Forums/Business 101
Sole Proprietor vs. LLC vs. Corporation
Zach Olson
posted this on June 15, 2011 01:29 pm
| Purpose | Start a Business | Start a Business Hold Assets | Start a Business Earn Income | Start a Business or Split Income |
|---|---|---|---|---|
| Tax Treatment | Sole Proprietorship | Partnership - LLC | S-Corporation | C-Corporation |
| State Filing | DBA Registration | Articles of Organization | Articles of Organization or Incorporation | Articles of Organization or Incorporation |
| Tax Filing | Schedule C | File Form 1065; use Schedule K1 to report pass-through income to partners or members | File Form 1120S; use Schedule K1 to report pass-through income to shareholders | File Form 1120 or 1120-A and pay tax on net income at corporate rates |
| Employment Tax | Net income subject to self-employment tax | Ordinary income generally subject to self-employment tax; passive income is not | Must pay "reasonable salary" subject to FICA; pass-through income not subject to employment tax | Salary income subject to FICA; dividends not subject to employment tax |
| Employee Benefits | Limited (proprietor is "self-employed") | Limited (partners/members are "self-employed") | Limited (<2% shareholders and spouses are "self-employed") | Greatest variety of deductible programs |
| Personal Liability | Proprietor personally liable for business. Consider organizing single-member LLC to limit personal liability. | General partners personally liable for business. Most advisors recommend organizing LLC or LLP to limit personal liability. | Shareholders not personally liable for business. State law may favor organizing LLC or LLP to be taxed as S-corp. | Shareholders not personally liable for business. State law may favor organizing LLC or LLP to be taxed as C-corp. |
| Other | Consider hiring family to establish deductible benefit programs Consider forming S-corp as income grows. |
Generally best vehicle for generating passive income from rents, royalties, etc. | Ownership limits apply (<101 shareholders; all must be US taxpayers) | Corporation can "zero out" income to avoid corporate tax or retain income to be taxed at lower corporate rate Beware special rules for personal service corporations & personal holding companies. |
Comments
Sure doesn't explain much that the average person could understand about the differences.
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