To follow is some basic information that outlines the major differences
of these types of businesses, both operationally and for tax purposes.
There is much more information on each type of business and its taxation
in the links provided at the end of this page. These are complicated and
complex subjects that require extensive and close examination. They are
not meant to be fully defined in this page. All of the information is referenced
from current 1998 tax guides. These descriptions are simply meant to be
an introduction to popular types of business that need to be evaluated
in conjunction with and context of the unique situations and objectives
of the potential business owner. This site is meant to provide only a framework
from which to move forward, not a definitive description. Please refer
to the linked sites for further information. And always be on the look
out for future changes in tax laws.
Proprietorship
Definition: self-employed. The business and the owner are a single entity.
Pros: Easy and inexpensive to set-up with little administrative work involved in both set-up and maintenance.Best suited for small business owner with little liability concern.
Cons: Owner and the business are a one entity. Created unlimited liability with regards to tax or product liability. If the business entity is sued the owner is personally liable. There is a great deal of risk involved
Taxes: Owner is responsible on Individual 1040, schedule C. Also,
if the business earns income in more than one state, the individual owner
has to file multi-state returns. Each state has a different ratio for the
tax rate used on the percentage of the income from that state as a percentage
the total income earned in the resident state. Some states do give credit
for taxes paid to another state in this situation.. Must use the same tax
year as the proprietor
Partnership
Definition: a syndicate, group, pool, joint venture or other unincorporated organization through which any business or financial venture is carried on that is not classified as a trust, corporation or estate. A "pass-through" entity that is subject to tax only once, at the partner level.
Pros: Inexpensive to set up. Few administrative duties involved. There is no limitation on who may be a partner, or on how may persons may be partners. There is a great deal of flexibility in allocation the entity's profits, losses and credits among partners.
Cons: Unlimited liabilty. No tax benefits
Taxes: The partners, not the partnership are taxed on the partnership's income. The partnership only files an information return (Form 1065) showing each partners distributive share of the partnership's income, gains, losses etc. Each partner then includes his or her share on his own return. (1040). If the partnership earns income in more than one state, each partner must file a state form reflecting his or her portion in that state. Each state has a different ratio that is used to determine taxes due on non-resident income. There are different minimums state by state. Some states will allow for a deduction of state taxes paid in an other state.
S Corporation
Definition: domestic corporation with single or multiple owners that meets the following qualifications. The corporation is a separate legal entity from the owners.
Qualifications: a corporation must be a domestic corporation in order to elect to be and be taxed as an S Corporation. If any one of the following is true the corporation will be ineligible for S corporation status:
Cons: can be costly to set-up and maintain. The corporation cannot take the following deductions allowed to individuals:
LLC
Definition: Single or multiple owner business where owner(s) need(s) limited liability but can elect to be taxed as a partnership or a corporation. Owners are not personally liable for the LLC's debts or obligations. These are still arelatively new form of business entity.
Pros: corporation is a separate legal entity from owner(s). Limited liability. Unlimited number of owners. Capital is easy to raise through sale of interests. If one owner leaves the corporation can remain in tact, unlike partnerships. LLC's offer the flow-through of tax attributes if characterized as a partnership.
Cons: some states do not allow the formation of single owner LLC's, Massachusetts for example. It is possible, in some instances for someone to attempt to "pierce the corporate shield" and sue the owners.
Taxes: can be classified as a partnership or a corporation for federal tax purposes.
http://www.irs.ustreas.gov/prod/cover.html