Pros & Cons of Various Business Entities

Sole Proprietorships;

Some of the basic advantages of a sole proprietorship are;

1) simplicity of formation:

2) simplicity of administrative operation:

3) simplicity of dissolution:

4) little if any legal fees for formation, operation & dissolution;

5) flexibilty of conversion to another entity;

6) centralization & flexibilty of power & management; &

7) single level of taxation:

Conversely, some of the disadvantages of a sole proprietorship are;

1) unlimited personal liability for both contracts and torts;

2) finite existence (as opposed to the perpetual existence of a corporate entity):

3) additional taxation of ‘self employment earnings'( as opposed to the exemption of the SE tax to shareholders of an S-Corporation and certain members of a Limited Liability Corporation):

4) non transferability of interests;

5) the possibility for higher tax rates depending upon the net earnings of the entity,based upon the fact it is a pass through conduit (and taxed at the individual rate of the owner): &

6) the inability to maximize various asset protection and estate planning strategies.

Partnerships:

A partnership is an association of co owners to carry on a business for profit. Some of the basic advantages of a sole proprietorship are;

1) flexibilty of conversion to another entity;

2) single level of taxation (unless you are a publicly traded partnership, in which case you are taxed as a corporation);

Conversely, some of the disadvantages of a partnership are;

1) unlimited personal liability for both contracts and torts;

2) additional taxation of ‘self employment earnings'( as opposed to the exemption of the SE tax to shareholders of an S-Corporation and certain members of a Limited Liability Corporation);

3) non transferability of interests;

4) the possibility for higher tax rates depending upon the net earnings of the entity, based upon the fact it is a pass through conduit (and taxed at the individual rate of the owner):

5) legal expense in drafting partnership agreement & accounting expense of tracking at risk basis, carryover losses per basis loss limitation rules, filing informational 1063 return, generating K-1’s, etc

S corp:

An S corp is an LLC or corporation that makes that election by filing form 2553. S corps are taxed at the individual shareholder level & its income is not subject to SE tax. However, each shareholder must pay himself a reasonable salary and, as such, is subject to payroll taxes and withholding.

Further, S corps are subject to the pass through deduction of 20% of its income limited by its total taxable income & further limited by the greater of 50% of wages or 25% of wages + 2.5% basis in property.

The deduction is available to all pass through conduits with the exception of certain service firms with income above $207,500/ $415,000 & service firms with income between $157,500/315,000 (single filers) & $207,500/ $415,000 ( married filers) in which case the deduction is subject to phaseout.

C corp;

A C corp is an LLC or corporation which makes that election by filing form 8832. C corps are taxed both at the corporate level (21% for 2019) and the individual shareholder level. To the extent that a distribution is made from the corporation’s earnings and profits, it is taxed to the shareholder as a dividend. The portion of the distribution that is not considered a dividend is applied first to reduce the shareholder’s basis in the corporation’s stock. Any remaining portion is treated as gain from the sale or exchange of property. Under Code Section 243, some dividends are excluded from double taxation, depending on the percentage of ownership the corporation has in the entity paying the dividends ( 0-20%= 50% exclusion, 20-80%= 65% exclusion, 80-100%= 100% exclusion).

Both S & C corps have the advantage of limited liability for shareholders, centralization of management & perpetual existence.