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Comparing Business Types

Use this chart to quickly compare entity characteristics before you incorporate. For additional information on business types, taxation, comparisons and corporation types, please visit the following links:

  Sole Proprietor C Corporation S Corporation LLC
Lawsuit protection for owners when business is sued? NO YES YES YES
Asset protection for business assets when owner is sued? NO NO NO YES
Additional business tax deductions available? NO YES YES YES
Who is taxed on business profits? Owner Corporation Shareholder Your choice – Owner or Company
When to use? Not recommended Own a business, to take advantage of lower corporate corporate taxes compared to individual income taxes, publicly traded company, to deduct medical expenses. Own a business where the owner will dispurse most of the corporate profits to himself/herself. To own real estate. To hold cash for asset protection. To own the stock in one’s corporations.
Benefits Few – high liability and fewer tax deductions than alternatives listed here. Only 15% corporate tax on the first $50,000 of income. Save 15.3% on taxes. Pay self a small but reasonable salary and pay the rest as a “distributionn to shareholders” to save the 12.4% Social Security and 2.9% Medicare for a total savings of 15.3% on this portion of income. When owner (member) is sued there are provisions in the law to protect assets held inside of the LLC from being seized.
Taxation As a sole proprietorship – all income flows through to owner. Corporation pays its own taxes after deductions. (All “for profit” corporations are taxed as C corporations by default.) Shareholders pay the taxes after deductions. (Must file an election to attain S corporation status). Shareholders can only be US citizens or resident aliens. Your choice. Can be taxed as a sole proprietorship, partnership, C corporation or S corporation. By default – taxed as sole proprietorship ** if only one owner, as a partnership if two or more owners. File a tax form to be taxed as a C corporation and an additional form to be taxed as an S corporation
Ownership Sole proprietor Shareholder Shareholder Member
Leadership Sole proprietor Officer/Director (can generally be same person) Officer/Director (can generally be same person) Manager/Member (can generally be same person)
Raising Capital Borrow money that is typically guaranteed personally Sell shares of stock to raise capital without personal guarantee of owners (subject to applicable laws) Sell shares of stock to raise capital without personal guarantee of owners (subject to applicable laws) Sell membership interest to raise capital without personal guarantee of owners (subject to applicable laws)
Guideline Documents None Bylaws Bylaws Operating Agreement
Ownership Documents None Shares Shares Operating agreement / Membership Units
Double taxation required? NO NO – only if dividends are paid. Thus, pay salaries and bonuses rather than dividends. NO NO
Can business deduct salaries to owner? NO – business and owner are one in the same for tax purposes. YES YES YES

* The letters “C” and “S” represent chapters in the IRS tax code. C corporations and S corporations are not types of corporations but types of corporate taxation.

** How an entity is taxed and how it protects the owner from lawsuits are two separate issues. For example, a sole proprietorship does not offer lawsuit protection for the owners. However, an LLC that is taxed as a sole proprietorship does.