Benefits and Drawbacks of Different Types of Business Entities

This article is designed to give you an easy-to-read version of some of the main benefits and drawbacks of different types of business entities.

Sole Proprietorships

• Main Advantages
• Easy to create and maintain.
• Business and owner are legally the same entity
• No fees associated with the creation of the business entity
• Owner may deduct a net business loss from personal income taxes
• Main Disadvantages
• Owner is personally liable for any debts, judgments or other liabilities of the business
• Owner must pay personal income taxes for all net business profits

General Partnerships

• Main Advantages
• Easy to create and maintain
• No fees associated with creation of the business entity
• Owners may report their share of net business losses on personal income taxes
• Main Disadvantages
• All owners are jointly and personally liable for any debts, judgments or other liabilities of the business
• Owners must pay personal income taxes for all net business profits

Limited Partnerships

• Main Advantages
• Easy to attract investors as they are only liable for their total amount of their investment into the business
• The limited partners enjoy limited liability for any debts, judgments or other liabilities of the business
• The general partners are more free to focus their attention on the business
• General partners are able to raise cash without diminishing their control of the business
• Limited partners can leave the business without dissolving the limited partnership
• Main Disadvantages
• General partners are jointly and personally liable for any debts, judgments or other liabilities of the business
• Can be more expensive to create than a general partnership
• Mainly suited to businesses such as real estate investment groups or in the film industry

Regular Corporation

• Main Advantages
• Owners of the business enjoy limited liability for the business' debts, judgments and other liabilities
• Some benefits may be deducted as business expenses
• With good accounting, owners and business may be able to pay lower taxes by splitting the business profits among owners
• Main Disadvantages
• More expensive to establish than a sole proprietorship or partnership
• Complicated paperwork that must be filed with the secretary of state
• Corporation must pay its own taxes as a separate tax entity

S Corporation

• Main Advantages
• Owners of the business enjoy limited liability for the business' debts, judgments and other liabilities
• Owners share the net profits of the business and report their share on personal income taxes
• Owners share the net business loss and can offset other income by reporting this loss on personal income taxes
• Main Disadvantages
• More expensive to establish than a sole proprietorship or partnership
• Paperwork is more complicated than the paperwork required for a LLC, but similar advantages
• The ownership interest of the various owners determines their respective incomes from the profits of the business
• Some benefits are only given to owners that have more than 2% of the business' shares

Professional Corporation

• Main Advantages
• Owners are not personally liable for the malpractice of other owners
• Main Disadvantages
• More expensive to establish than a sole proprietorship or partnership
• The paperwork and filings may be onerous to owners
• Every owner must be in the same profession as all other owners

Nonprofit Corporation

• Main Advantages
• Corporation does not pay income taxes on money it receives for a charitable purpose
• Donors that give for a charitable purpose may deduct their donations from income taxes
• Some benefits may be deducted as business expenses
• Main Disadvantages
• The full tax benefits and advantages can only be utilized by businesses that have been incorporated for a charitable, educational, scientific, religious or literary purpose.
• If property is transferred to the nonprofit corporation, the property must stay with the corporation.  Even if the corporation ends, the property must go to another nonprofit

Limited Liability Company (LLC)

• Main Advantages
• Owners of the business enjoy limited liability for the business' debts, judgments and other liabilities, even if the owners engage in significant control of the business
• The business profits and losses can be allocated to the owners along different lines than ownership interest (for example, a 10% owner may be allocated 30% of the business' profits)
• Owners can choose how the LLC will be taxed, either as a partnership or a corporation
• Main Disadvantages
• More expensive to establish than a sole proprietorship or partnership

Professional Limited Liability Company

• Main Advantages
• Allows state licensed professionals to enjoy the same advantages as a LLC
• Main Disadvantages
• Same disadvantages as a LLC
• All members must belong to the same profession

Limited Liability Partnership

• Main Advantages
• Business entities associated with things like law, medicine and accounting normally use this
• Partners are not liable for the malpractice of other partners
• Partners take their share of loss or gain on their personal income taxes
• Main Disadvantages
• Partners remain personally liable for obligations to business creditors, landlords and lenders
• Not every state allows limited liability partnerships
• Often limited to only a select few professions