What are the advantages and disadvantages of the following: 1040/Schedule-C,
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| Sole Proprietorship | Partnership |
Corporation
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S Corporation
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Limited Liability
Company |
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| IRS Pub | 334 | 541 | 542 | 589 | 541 |
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IRS Form
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Sch.C, Form 1040
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Form 1065
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Form 1120C
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Form 1120S
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Form 1065
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| Organization
& Administration |
Easiest business to organize. Allows complete
intermingling of business and personal funds (although this is not recommended). Partnerships and corporations cannot intermingle business with personal funds. Business return is filed along with the owners individual income tax return. |
Easy to organize. A written partnership agreement is recommended, but not required. The partnership agreement determines how income and losses are allocated to the partners. If a partnership agreement does not exist, partnership items pass through based on the partners’ ownership interests. |
Difficult and expensive to organize. Must
hold periodic board meetings and keep minutes. Must comply with federal and state regulations. |
Set up as a regular corporation. Must make election to be treated as an S corporation. Certain events will cause automatic termination of S status. |
An existing partnership can generally register for LLC status in the state in which it conducts business. Registration is generally less complicated than forming |
| Bookkeeping
& Accounting |
Fewer requirements on what type of bookkeeping system or accounting method is used. The system must be consistent; clearly show income and expenses; and allow the taxpayer to file an accurate return. The sole proprietorship must follow the same tax year as the owner |
Depending on income and assets, the partnership may be required to include a balance sheet with its income tax return. Therefore, the partnership should use the double entry method for bookkeeping purposes. If a partner exchanges property other than cash in exchange for an interest in a partnership, special accounting rules must be applied |
The balance sheet on the corporation’s tax return must agree with the corporate books. The corporation must use a double entry bookkeeping system. The corporation must file all necessary employment tax returns. |
Must use double entry bookkeeping. Must file all required payroll tax and reporting forms. |
Same as a partnership |
| Owner Control
and Flexibility |
Owner is free to make all business decisions |
Control of the business operations is divided among partners. |
Shareholders have control over the corporation to the extent that they own voting stock. |
Shareholders have control over the corporation to the extent that they own voting stock. |
Control is divided among members. |
| Transfer of Ownership |
A sole proprietorship is not a separate entity from its owner. “Sale” of a sole proprietorship is actually a sale of assets. |
The partnership agreement may restrict the sale of a partnership interest, and may control the terms of the sale. |
Ownership is easily transferred by selling shares of stock. The corporate charter may place certain restrictions on the sale of stock by shareholders. |
Ownership is transferred by sale of stock. The corporate charter may place certain restrictions on the sale of stock by shareholders. |
The operating agreement may restrict transfer of ownership interest. |
| Advantages
& Disadvantages
|
Advantages:
-Minimum legal restrictions. -Easy to discontinue Disadvantages: –Unlimited liability. -May not bring in new owners or outside capital contributions. -Income tax cannot be deferred by retaining profits. |
Advantages:
-A partnership can be a good way to combine the skills and/or financial Disadvantages: -A partnership is often easier to get into than out of. -General partners are liable for actions of other partners.
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Advantages:
–Limited liability. -Perpetual life. -Ability to raise capital through issuance of stock -Ease of transfer of ownership. Disadvantages: -Double taxation of profits. -Corporate charter restricts types of business activities. -Subject to various state and federal controls. |
Advantages:
-Limited liability. -Avoids double taxation of profits. -Profits passed through are not subject to SE tax as in a partnership Disadvantages: –Shareholders pay tax on earnings even if undistributed. -Less flexibility in choosing a tax year. -Contribution limits to a qualified retirement plan are based on employee/shareholder’s |
Advantages:
–Avoids certain S corporation restrictions. -Avoids double taxation of profits. Disadvantages: -Inconsistent treatment state to state. -Must have at least two owners. -Relatively new business entity with little regulatory or case law to |
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