Sole ProprietorC CorporationS CorporationLLC
Lawsuit protection for owners when business is sued?NOYESYESYES
Asset protection for business assets when owner is sued?NONONOYES
Additional business tax deductions available?NOYESYESYES
Who is taxed on business profits?OwnerCorporationShareholderYour choice – Owner or Company
When to use?Not recommendedOwn 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.
BenefitsFew – 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.
TaxationAs 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
OwnershipSole proprietorShareholderShareholderMember
LeadershipSole proprietorOfficer/Director (can generally be same person)Officer/Director (can generally be same person)Manager/Member (can generally be same person)
Raising CapitalBorrow money that is typically guaranteed personallySell 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 DocumentsNoneBylawsBylawsOperating Agreement
Ownership DocumentsNoneSharesSharesOperating agreement / Membership Units
Double taxation required?NONO – only if dividends are paid. Thus, pay salaries and bonuses rather than dividends.NONO
Can business deduct salaries to owner?NO – business and owner are one in the same for tax purposes.YESYESYES