Are You a Legal Professional?

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
Next Steps
Contact a qualified business organizations attorney to help you
choose the best formation for your business.
(e.g., Chicago, IL or 60611)

Help Me Find a Do-It-Yourself Solution