|
|
Sole Proprietor |
C Corporation |
S Corporation |
LLC |
|
Lawsuit protection for owners when business is sued? |
NO |
YES |
YES |
YES |
|
Asset protection for business assets when owner is sued? |
NO |
NO |
NO |
YES |
|
Additional business tax deductions available? |
NO |
YES |
YES |
YES |
|
Who is taxed on business profits? |
Owner |
Corporation |
Shareholder |
Your choice – Owner or Company |
|
When to use? |
Not recommended |
Own a business, to take advantage of lower corporate taxes compared to individual income taxes, publicly traded company, to deduct medical expenses. |
Own a business where the owner will disburse most of the corporate profits to himself/herself. |
To own real estate. To hold cash for asset protection. To own the stock in one’s corporations. |
|
Benefits |
Few – high liability and fewer tax deductions than alternatives listed here. |
Only 15% corporate tax on the first $50,000 of income. |
Save 15.3% on taxes. Pay self a small but reasonable salary and pay the rest as a “distribution to shareholders” to save the 12.4% Social Security and 2.9% Medicare for a total savings of 15.3% on this portion of income. |
When owner (member) is sued there are provisions in the law to protect assets held inside of the LLC from being seized. |
|
Taxation |
As a sole proprietorship – all income flows through to owner. |
Corporation pays its own taxes after deductions. (All “for profit” corporations are taxed as C corporations by default.) |
Shareholders pay the taxes after deductions. (Must file an election to attain S corporation status). Shareholders can only be US citizens or resident aliens. |
Your choice. Can be taxed as a sole proprietorship, partnership, C corporation or S corporation. By default – taxed as sole proprietorship ** if only one owner, as a partnership if two or more owners. File a tax form to be taxed as a C corporation and an additional form to be taxed as an S corporation |
|
Ownership |
Sole proprietor |
Shareholder |
Shareholder |
Member |
|
Leadership |
Sole proprietor |
Officer/Director (can generally be same person) |
Officer/Director (can generally be same person) |
Manager/Member (can generally be same person) |
|
Raising Capital |
Borrow money that is typically guaranteed personally |
Sell shares of stock to raise capital without personal guarantee of owners (subject to applicable laws) |
Sell shares of stock to raise capital without personal guarantee of owners (subject to applicable laws) |
Sell membership interest to raise capital without personal guarantee of owners (subject to applicable laws) |
|
Guideline Documents |
None |
Bylaws |
Bylaws |
Operating Agreement |
|
Ownership Documents |
None |
Shares |
Shares |
Operating agreement / Membership Units |
|
Double taxation required? |
NO |
NO – only if dividends are paid. Thus, pay salaries and bonuses rather than dividends. |
NO |
NO |
|
Can business deduct salaries to owner? |
NO – business and owner are one in the same for tax purposes. |
YES |
YES |
YES |
