Comparison of Business Entity Types

SOURCE: Creating and Running a Business, Trust, or Estate, Form #09.079, Section 6.2

Type of Business	Sole Proprietorship	Partnerships		Corporations		Limited Liability Company	Trust
Type of Business	Sole Proprietorship	General	Limited	C Corp	S Corp	Limited Liability Company	Trust
Definition	A business owned and operated by one person for profit.	Two or more people who jointly own or operate a business for profit	Two or more people who jointly own a business for profit consisting of at least one “general partner” who manages the partnership while subject to unlimited personal liability and at least one “limited partner” who is a passive investor with no management rights and has limited liability.	A corporation is a legal entity separate and distinct from its owners. It is considered a limited liability entity, as none of the owners are typically liable for the corporation’s debts by virtue of being a shareholder. A “C corporation” is a corporation that has not made an election to be an “S corporation.”	Functions in the exact manner as a regular C corporation except that it is taxed differently. It is considered a pass through entity.	An unincorporated business entity that combines (1) the limited liability protection offered by a corporation and (2) pass through tax treatment associated with the partnerships and S-corporations.	A legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary. Trusts can be established to provide legal protection for the trustor’s assets to ensure they are distributed according to their wishes.
Who Owns Business?	Sole Proprietor	Partners	Partners	Shareholders	Shareholders	Members	Trustees
Ease of Formation	If necessary, acquire licenses and permits, register fictitious name, and obtain taxpayer identification number.	Formation of a general partnership requires no formal filings and may be express, implied, oral, or written. Nevertheless, a written agreement concerning the terms and conditions of the business venture should preferably be drafted in writing. Must acquire taxpayer identification number. If necessary, register fictitious name.	Unlike general partnerships, limited partnerships may only be created where: (1) there is a written agreement among the partners; and (2) a “certificate of limited partnership” is filed with the Secretary of State	Forming a corporation requires filing articles of incorporation with the Secretary of State, electing directors, appointing officers, preparing and adopting bylaws, issuing stock to the shareholders, and obtaining taxpayer identification number. Within 90 days after filing the articles, the LLC must file a Statement of Information with the Secretary of State. After incorporation, corporate formalities must be followed (e.g., annual minutes).	Same as C corporation. Formation also requires that certain qualifying criteria are met and file a timely (within 2 ½ months of first taxable year) “S election” with IRS.	File articles of organization with the Secretary of State. Adopt operating agreement, and file other necessary documents with Secretary of State. Must acquire taxpayer identification number. Within 90 days after filing the articles, the LLC must file a Statement of Information with the Secretary of State.	Settlor writes and approves the trust indenture, selects trustees, and has it notarized. No public record required.
Period of Existence	Terminates at will or on the death of the owner.	Terminates by agreement, or by death or withdrawal of partner, unless there is a partnership agreement to the contrary.		Continues until formal dissolution. Most stable form of business. Not affected by death or disaffiliation of shareholder.		May terminate by agreement, or withdrawal of a member, depending upon operating agreement.	Terminates when corpus is exhausted or trustees resigns or beneficiaries die.
Taxes	Profits are taxed once. Profit and loss are reported on the owner’s individual state and federal income tax returns	Profits are taxed once. Each partner reports his or her share of the profit and loss on his or her individual state and federal income tax returns. Partnership files an information return.		Profits are subject to double taxation, once at the corporate level, and again at the shareholder level.	Profits are taxed once. Each shareholder reports his or her share of profit and loss on individual income tax returns. S corp. does not pay tax, with some exceptions.	Each member reports his or her share of the profit and loss on his or her individual income tax returns. It is taxed like a partnership or an S corp. An LLC also has the option of being taxed like a corporation	Trusts are taxed based on the type of trust and type of income1. Here’s a brief overview: 1. Revocable Trusts: The income for a revocable trust is considered the grantor’s income and the grantor must pay income taxes on it1. The trust should still file Form 1041 if it earned taxable income1. 2. Irrevocable Trusts: For irrevocable trusts, the trust must file its own tax return by completely filling out Form 1041, and then it must pay any taxes it owes. If a beneficiary received income from the trust, the trust must send that beneficiary a copy of Schedule K-11.
Tax Return to File	Files taxes as part of the individual’s personal tax return. The business owner reports income or loss from their business on their personal tax return1. Here are the forms a sole proprietorship typically files: Form 1040 or 1040-SR: This is the U.S. Individual Income Tax Return or U.S. Tax Return for Seniors.Schedule C (Form 1040 or 1040-SR): This form, titled “Profit or Loss from Business,” is used to report income or loss from a business operated or a profession practiced as a sole proprietor.Schedule SE (Form 1040 or 1040-SR): This form is used to figure the tax due on net earnings from self-employment.	A partnership files its federal income tax returns using Form 1065. This is an information return, meaning that no tax is imposed directly on the partnership based on information in Form 1065. Instead, it “passes through” any profits or losses to its partners. Each partner reports their share of the partnership’s income or loss on their personal tax return. Partners are not employees and shouldn’t be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners.		Form 1120, U.S. Corporation Income Tax Return. This form reports the corporation’s income, gains, losses, deductions, credits, and income tax liability. In addition to Form 1120, a C corporation may also need to report capital gains and losses on Schedule D (Form 1120).	An S corporation files a federal Form 1120S, U.S. Income Tax Return for an S Corporation. This form reports the S corporation’s income, deductions, and payments. In addition to Form 1120S, an S corporation must also provide a Schedule K-1 for each shareholder. The Schedule K-1 reports each shareholder’s pro-rata share of the corporation’s income, deductions, and credits.	1065 Single-member LLCs: If the only member of the LLC is an individual, the LLC income and expenses are reported on Form 1040, Schedule C, E, or F.Multiple-member LLCs (Partnership): An LLC with more than one owner is recognized by the IRS as a partnership. In this situation, an informational partnership tax return is filed by the LLC, and owners (members) file expenses and income on personal tax returns. The LLC should file a Form 1065, U.S. Return of Partnership Income.Corporation: If the only member of the LLC is a corporation, the LLC income and expenses are reported on the corporation’s return, usually Form 1120 or Form 1120S. An LLC can also elect to be treated as a corporation by filing Form 8832.	1041
Pass Through Income/Loss	Yes	Yes		No	Yes	Yes	Yes (To beneficiaries and/or Trustees as compensation)
Deductibility of Business Losses	Owner may use losses to deduct other income on individual tax returns (subject to active-passive investment loss rules that apply to all businesses)	Partners may use losses to deduct other income on individual tax returns if “at risk” for loss or debt		Corporation may deduct business losses (shareholders may not deduct losses	Shareholders may deduct share of corporate losses on individual tax returns, but must comply with special limitations	Follows sole proprietorship, partnership or corporate loss rules depending on tax status of LLC	Can deduct business losses, but there are specific rules and limitations. Estates and trusts may deduct the Distributable Net Income (DNI) or the sum of the trust income required to be distributed—whichever is less—and other amounts sufficiently paid, credited, or obligated to be distributed to beneficiaries in order to avoid double taxation on income1. Your trust can offset capital gains and up to $3,000 of standard income with capital losses. Any losses in excess may be pushed forward and used in future tax years. However, they may not pass through to the beneficiaries prior to the year that the trust concludes. Losses incurred by trusts are generally trapped in the trust and can’t be passed to beneficiaries or shareholders.
Double Taxation	No	No		Yes	No	No	Yes
Raising Capital	Sole proprietor contributes whatever capital needed; business loans may also be used	The partners typically contribute money or services to the limited partnership, and receive an interest in profits and losses; business loans may also be used		Sell shares of stock (may offer various classes of shares); business loans; may go public if substantial infusion of cash needed	Generally same as C corporation – but can’t have foreign, partnership or corporate shareholders; must limit number of shareholders to 75; can’t offer different classes of stock to investors except for shares with different of no voting rights	The members typically contribute money or services to the LLC, and receive an interest in profits and losses; business loans may also be used	Settlor contributes the initial corpus.
Do State and Federal Securities Laws Apply?	Generally not	Generally not		Issuance or transfer of stock subject to state and federal securities laws		Generally not, if all members are active in the business	Yes. U.S. securities laws require potential investors, including trusts and other entities commonly used in estate-planning transactions, to meet certain requirements to be eligible to participate in transactions exempt from registration
Fringe Benefits	Sole proprietor may set up IRA or Keogh retirement plan; may deduct all or a portion of medical insurance premiums	General partners and other employees may set up IRA or Keogh plans; may deduct all or a portion medical insurance premiums		Full tax-deductible fringe benefits for employee-shareholders; may deduct medical insurance premiums and reimburse employees’ medical expenses	Same as general partnership, but employee-shareholders owning 2% or more of stock are restricted from corporate fringe benefits under partnership rules	Can get benefits associated with sole proprietorship, partnership or corporation, depending on tax treatment of LLC	Can offer fringe benefits. Employer contributions to bona fide trusts such as 401(k)s, or health savings accounts (HSAs). Exempt from annualization and provide large company tax savings. Unlike cash payments, contributions to bona fide trusts are exempt from social security and workers’ compensation, as well as federal and state unemployment taxes
Management	Owner has full control of management and operations	Typically each partner has an equal management rights unless otherwise agreed	General partners have all management rights. Limited partners have no management rights. Limited partners lose liability protection if they partake in management.	Shareholders elect Directors, who manage corporation. Directors appoint officers. Rigid structure required.		Manager or Member managed. Flexibility permits parties to customize management structure.	Trustee(s) have full control of the business.
Liability	The owner’s personal assets are at risk.	Each partner’s personal assets are at risk.	General partners’ personal assets are at risk. A limited partner is liable only to the extent of his or her investment.	Limited to corporate assets, except: If a court “pierces the corporate veil” to impose personal liability on shareholders;Personal negligence or fault; orPersonally guaranteed business debts.		Similar to rules for corporations.	Limited to trust corpus.
Dissolution	Easiest form of business to dissolve. Pay debts, taxes, and claims against business.	Pay debts, taxes, and claims against business. Settle partnership accounts.	Pay debts, taxes, and claims against business. Settle partnership accounts. File cancellation of certificate with the Secretary of State	Obtain shareholder approval to dissolve. File certificate of dissolution with the Secretary of State. Pay debts, taxes, and claims against business. Distribute corporate assets to shareholders.		Pay debts, taxes, and claims against business. Distribute remaining assets to members. File articles of dissolution with the Secretary of State.	Beneficiaries die, all trustees resign and there is no protector, or dissolve per terms of the trust.