| 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 |
