Are You a Legal Professional?

Business Form and Taxation: Pros and Cons

When you're starting a business, one of the first decisions you'll have to make is whether to be a sole proprietorship, partnership, corporation, limited liability company, or nonprofit organization. The type of business form you choose will depend on the nature of your business, the goals of the business, and other factors -- including taxation.

While taxes should not be your only consideration when choosing a business legal structure, it's a good idea to compare the tax obligations and regulations of each. The taxation pros and cons of each type of business form are listed in the following chart.

Business Form

Pros

Cons

Sole Proprietorship

-Easy to set up

-No double taxation

-Income reported on personal income tax return

-Taxes paid on income of the business and not on business as an entity.

-No personal limited liability protection

-You pay twice the amount of Social Security/Medicare taxes as you would as an employee

-No life insurance deduction; partial health insurance deduction

Partnership

-No double taxation

-All income is taxed proportionately to each of the partners who report it on their personal tax returns

-No personal limited liability protection (unless a limited partner in a limited partnership
"S" Corporation

-S Corporation may elect to be treated as a partnership for federal tax purposes with shareholders reporting their share of the corporation's separately listed items of income, deductions, loss, and credit on their personal tax returns

-Shareholders have personal limited liability

-S Corporation may not have more than seventy-five shareholders

-Shareholders and those owning 5 percent or more in stock have limited employee benefits

"C" Corporation

-Shareholders have limited personal liability

-Health insurance premiums and group life insurance up to $50,000 in benefits are fully deductible by the corporation and not taxable to the employees

-The corporate tax rate doesn't go as high as the individual rate (what a sole proprietor or partner would pay on an individual tax return)

-Double taxation-the corporation pays taxes on its income and the shareholder pays taxes on dividends

-Shareholders cannot deduct the losses of the corporation

Limited Liability Company (LLC)

-Personal limited liability of members

-No double taxation

-May have more than seventy-five members

-Under IRS "check-the-box" rules a limited liability company may choose whether to be taxed like a partnership or a corporation

-Active members are subject to self-employment tax for Social Security and Medicare

-Limited liability companies are a relatively new business form and the laws are still evolving

Additional Resources

For additional guidance on structuring and managing your business, see the articles below.

Get a Free Initial Evaluation With a Tax Attorney

There are many factors to consider when deciding on the best legal structure for your business, including tax implications. An attorney can not only help determine the right business structure, but can also prepare the necessary paperwork to set it up. There are attorneys near you who will provide you with an initial evaluation of your situation at no cost to you.

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