Summary Of Considerations For Selection Of Business Entity
| Corporation | LLC | Sole Proprietorship | |
| Who Is This Entity Perfect For? | Multiple owner business who do not mind complying with administrative formalities and where the exposure to personal liability & complex tax planning is a primary concern. | Sole or multiple- owner business where owner(s) need(s) limited liability but want to be taxed as an individual. Many who consider an LLC also consider an Corporation where they elect S-Status as the LLC & “S-Corp” entities have similarities. | Sole-owner business who want limited compliance responsibilities where taxes or liability (risk of being sued) are not a concern. |
| Number of Owners | 1-100 (for S); More than 1 (for C) | One or more | One |
| Types of Owners | Limited to U.S. residents (people who file taxes as U.S. residents) and citizens and to certain trust/estate (for S);Any (for C) | Any | Any |
| What are the Advantages? | Limited liability; Capital is easy to raise through sale of stock; Tax savings through income splitting (C only) | Limited liability; Capital is easy to raise through sale of interests; Pass- through taxation to personal income tax return; Unlimited number of owners & no restrictions on owners. | Inexpensive to form; Few administrative duties. |
| What are the Disadvantages? | More administrative duties; S Corp must have fewer than 100 shareholders and owners must be resident aliens. | Can be costly to form due to publication requirement. | No tax benefits; Unlimited liability; Business dissolves upon death of owner. |
| Cost of Formation | Moderate | Expensive due to Publication requirement. | Low |
| How easy is it to set up? | Most difficult as you must appoint a board, develop articles of incorporation, bylaws and follow other formalities. | Not difficult but you must create an operating agreement and meet the publishing requirements in your State. | Easy |
| What happens if someone wants to sue the business? Am I protected? | Corporation is a separate legal entity & if someone sues and wins, they cannot come after your assets. This is called “limited liability protection.” | Same as Corporation. | You and the business entity are the same person. If your business is sued and the business does not have enough money, they can come after you. |
| Will I be subject to tax on the income the business makes and my personal income? Said another way, will I be subject to “Double taxation.”? | Yes unless you elect for S-Corp status. The election is free but if you elect this you must be a resident for tax purposes and you will have other ownership restrictions. | No. The income from the business is automatically passed through to your personal income tax return so you are not subject to double tax. | No |
| Can I make an S-election? | Yes | Yes | No |
| Do I pay Income taxes? | Yes | Yes | Yes |
| Do I have to pay Self-Employment Taxes? | Yes – but if you make an S election, you will only pay self-employment taxes on the amount you designate as your salary. (This salary must be reasonable to qualify) | Yes – but you can make an S – election so that you only pay self-employment tax on the amount you designate as your salary. | Yes |
| If I am a Professional, do I have to set up as a Special Entity? | Yes. You must set up a professional corporation and the requirements will be outlined by your State. Also, you must buy malpractice insurance. | Yes. You must set up a professional LLC and the requirements will be set up by your state. Also, you must buy malpractice insurance. | No |
