Business Entities – Legal & Tax Differences

By On July 21, 2012 · Leave a Comment

Were you ever confused of what the differences are between a Corporation, S-Corp, and an LLC? We’ve been asked this many times and decided to help out our fellow entrepreneurs with a quick summary of the tax and legal implications of each when considering how to incorporate your business.

Structure Legal Considerations Tax Considerations
Sole Proprietor
  • Owner remains personally liable for lawsuits filed against the business
  • No state filing required to form a sole proprietorship
  • Easy to form and operate

 
  • Owner report their share of profit and loss in the company on their personal tax returns
  • Profits subject to self-employment (SE) taxes, essentially Social Security and Medicare taxes
Partnership
  • Partners remain personally liable for lawsuits filed against the business
  • Usually no state filing required to form a partnership
  • Easy to form and operate

 
  • Owners report their share of profit and loss in the company on their personal tax returns.
  • Profits subject to self-employment (SE) taxes, essentially Social Security and Medicare taxes
Corporation
  • Independent legal structure
  • Help separate owners’ personal assets from your business debts
  • unlimited number of shareholders
  • Required to hold annual meetings and record meeting minutes
  • Corporation (excluding nonprofits) is comprised of shareholders, directors and officers
  • Governed by many formal regulations
  • A corporation does not offer much flexibility in how the business will be managed

 
  • Independent tax structure
  • Taxed on corporate profits and shareholder dividends
  • Double taxation (one at corporate level, and then at shareholder level)
Professional Corporation(only for “professional” services such as legal or medical services)
  • A corporation formed for the purpose of conducting a profession which requires a license to practice, including attorneys, physicians, dentists, certified public accountants, architects, and real estate brokers.
  • Professional negligence not shielded
  • Similar to Corporations for tax purposes
S Corporation
  • Independent legal structure
  • Help separate your personal assets from your business debts
  • Owners report their share of profit and loss in the company on their personal tax returns
  • Limited number of shareholders, who must also be U.S. citizens or residents.
  • Required to hold annual meetings and record meeting minutes

 
  • Independent tax structure
  • This federal tax status enables companies to “pass through” their taxable income or losses to owners/investors in the business, according to their ownership stake in the business.
Professional S Corporation(only for “professional” services such as legal or medical services)
  • a Corporation formed for the purpose of conducting a profession which requires a license to practice, including attorneys, physicians, dentists, certified public accountants, architects, and real estate brokers
  • Professional negligence not shielded
  • Similar to S-Corp for tax purposes
LLC
  • Independent legal structure
  • Owners (aka members) have limited liability from creditors
  • Within 120 days after Filing the Articles of organization, a LLC must publish in two newspapers, once a week for six (6) consecutive weeks, a copy of the Articles of Organization
  • The name of the company must contain the words “limited liability company” or the abbreviation “L.L.C.,” or “LLC”
  • Not required to file annual meetings or record minutes
  • Governed by operating agreements
  • An LLC structure may be managed by its members, much like a partnership, or it may be managed by one or more managers with the members being more passive investors, like a corporation. In short, an LLC offers greater flexibility in managing a business than a corporation
  • LLC can elect to be taxed as a Corporation, Partnership, or Sole Proprietor
  • Benefits of pass-through taxation
  • A single member LLC can also choose to be taxed as a C Corporation or an S Corporation
  • Profits subject to self-employment (SE) taxes, essentially Social Security and Medicare taxes
PLLC(only for “professional” services such as legal or medical services)
  • a LLC formed for the purpose of conducting a profession which requires a license to practice, including attorneys, physicians, dentists, certified public accountants, architects, and real estate brokers.
  • Professional negligence not shielded
  • Similar to LLC for tax purposes
LLP
  • For more than 1 member
  • General partner has unlimited liability
  • Limited partners have limited legal liability
  • Similar to Partnership for tax purposes
PLLP(only for “professional” services such as legal or medical services)
  • a LLP formed for the purpose of conducting a profession which requires a license to practice, including attorneys, physicians, dentists, certified public accountants, architects, and real estate brokers.
  • Professional negligence not shielded
  • Similar to Partnership for tax purposes
 
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