Chart: Ways to Organize Your Business

The pros and cons of corporations, LLCs, partnerships, sole proprietorships, and more.

Type of Entity

Main Advantages

Main Drawbacks

Sole Proprietorship Simple and inexpensive to create and operate
Owner reports profit or loss on his or her personal tax return
Owner personally liable for business debts
General Partnership Simple and inexpensive to create and operate
Owners (partners) report their share of profit or loss on their
personal tax returns
Owners (partners) personally liable for business
debts
Limited Partnership Limited partners have limited personal liability
for business debts as long as they don’t participate in management
General partners can raise cash without involving outside investors
in management of business
General partners personally liable for business
debts
More expensive to create than general partnership
Suitable mainly for companies that invest in real estate
Regular Corporation Owners have limited personal liability for business
debts
Fringe benefits can be deducted as business expense
Owners can split corporate profit among owners and corporation,
paying lower overall tax rate
More expensive to create than partnership or
sole proprietorship
Paperwork can seem burdensome to some owners
Separate taxable entity
S Corporation Owners have limited personal liability for business
debts
Owners report their share of corporate profit or loss on their
personal tax returns
Owners can use corporate loss to offset income from other sources
More expensive to create than partnership or
sole proprietorship
More paperwork than for a limited liability company which offers
similar advantages
Income must be allocated to owners according to their ownership
interests
Fringe benefits limited for owners who own more than 2% of shares
Professional Corporation Owners have no personal liability for malpractice
of other owners
More expensive to create than partnership or
sole proprietorship
Paperwork can seem burdensome to some owners
All owners must belong to the same profession
Nonprofit Corporation Corporation doesn’t pay income taxes
Contributions to charitable corporation are tax-deductible
Fringe benefits can be deducted as business expense
Full tax advantages available only to groups
organized for charitable, scientific, educational, literary or
religious purposes
Property transferred to corporation stays there; if corporation
ends, property must go to another nonprofit
Limited Liability Company Owners have limited personal liability for business
debts even if they participate in management
Profit and loss can be allocated differently than ownership interests
IRS rules now allow LLCs to choose between being taxed as partnership
or corporation
More expensive to create than partnership or
sole proprietorship
State laws for creating LLCs may not reflect latest federal tax
changes
Professional Limited Liability Company Same advantages as a regular limited liability
company
Gives state licensed professionals a way to enjoy those advantages
Same as for a regular limited liability company
Members must all belong to the same profession
Limited Liability Partnership Mostly of interest to partners in old line professions
such as law, medicine and accounting
Owners (partners) aren’t personally liable for the malpractice
of other partners
Owners report their share of profit or loss on their personal tax
returns
Unlike a limited liability company or a professional
limited liability company, owners (partners) remain personally
liable for many types of obligations owed to business creditors,
lenders and landlords
Not available in all states
Often limited to a short list of professions

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