Business Entity Types - Which is Best for Your Business?

Simplified Tax Filing

The business owner can file a single tax return, which can be easier and less expensive than filing separate tax returns for the business and the owner.

Self-Employment Tax Deduction

A sole proprietor can deduct half of their self-employment tax (which includes Social Security and Medicare taxes) on their personal tax return.

Deductible Business Expenses

The business owner can deduct all "ordinary and necessary" business expenses from their taxable income, reducing their overall tax burden.

Home Office Deduction

If the business owner operates the business from a home office, they may be able to deduct a portion of their home expenses, such as rent or mortgage interest, utilities, and maintenance.

Start-Up Cost Deduction

The business owner may be able to deduct certain start-up costs (such as legal and accounting fees) within the first year of starting the business.

Pass-Through Taxation

The partnership itself does not pay income tax. This can be beneficial because it avoids double taxation, which occurs when a corporation pays income tax on its profits and then its shareholders pay personal income tax on the dividends they receive.

Self-Employment Tax Savings

Partners in a partnership are generally not considered employees and therefore are not subject to payroll taxes (i.e., Social Security and Medicare taxes) on their share of partnership income.

However, partners are subject to self-employment tax on their share of partnership income, but the amount subject to self-employment tax is generally lower than if the partnership was structured as an S corporation or a C corporation.

Flexibility in Allocation of Profits and Losses

Partnerships have more flexibility than corporations in allocating profits and losses among partners. This can be advantageous in situations where partners have different financial needs or where one partner is more actively involved in the business than the other.

Deduction of Start-Up Expenses

Partnerships can deduct up to $5,000 of start-up expenses and an additional $5,000 of organizational expenses in the first year of operation. Any remaining start-up or organizational expenses can be amortized over a 180-month period.

Pass-Through Taxation

LLCs are typically treated as pass-through entities for tax purposes. This means that the profits and losses of the LLC are reported on the personal tax returns of the individual owners, rather than being subject to corporate taxes.

Self-Employment Tax Savings

Unlike owners of a corporation, LLC owners do not have to pay self-employment tax on the entire net income of the business. Instead, they only pay self-employment tax on their individual share of the profits.

Deductible Expenses

LLC owners can deduct a wide variety of business-related expenses from their taxable income such as salaries paid to employees, rent, utilities, and office supplies.

Flexibility in Profit Distribution

LLCs offer flexibility in how profits are distributed among owners. This can help owners minimize their tax liability by allocating profits to owners with lower tax rates.

Reduced Audit Risk

LLCs are less likely to be audited by the IRS compared to C corporations, which can save business owners time and money in the long run.

Limited Liability Protection

Corporations provide limited liability protection for shareholders, which means that the personal assets of shareholders are typically not at risk in the event of lawsuits or debt obligations.

Lower Tax Rates

Corporations enjoy lower tax rates than individuals and are taxed as a separate legal entity. Depending on the size of the corporation, the tax rate can be as low as 21%.

Tax-Deductible Expenses

Corporations can deduct a wide range of expenses from their taxable income including employee salaries, benefits, rent, and other business-related expenses.

Retirement Plans

Corporations can offer their employees a range of retirement plans, such as 401(k) plans, which provide tax benefits for both the employee and the corporation.

Income Splitting

Corporations can distribute income among shareholders, allowing them to potentially reduce their tax liability by shifting income to shareholders in lower tax brackets.

Tax-Exempt Status

Cooperatives may be eligible for federal and state tax-exempt status, which means that they are not required to pay federal income tax on their earnings.

Pass-Through Taxation

Cooperatives are generally taxed as pass-through entities, which means that the business itself does not pay income tax. Instead, the profits and losses are passed through to the members, who report the income on their individual tax returns.

Deductible Expenses

Cooperatives are allowed to deduct certain expenses from their income such as wages, salaries, rent, and utilities. This can reduce the taxable income of the cooperative and the tax liability of the members.

Patronage Dividends

Cooperatives can distribute profits to their members in the form of patronage dividends, which are not subject to income tax at the cooperative level. Instead, they are taxed as income for the individual members.

Retained Earnings

Cooperatives can retain earnings in a reserve fund, which is not subject to income tax. This can help the cooperative build financial stability and invest in future growth.