Chart: Ways to Organize Your Business

The pros and cons of corporations, LLCs, partnerships, sole proprietorships, and more.

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Type of EntityMain AdvantagesMain Drawbacks
sole proprietorshipSimple and inexpensive to create and operate, owner reports profit or loss on his or her personal tax returnOwner personally liable for business debts
General PartnershipSimple and inexpensive to create and operate, owners (partners) report their share of profit or loss on their personal tax returnsOwners (partners) personally liable for business debts
limited partnershipLimited 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 businessGeneral partners personally liable for business debts
More expensive to create than general partnership
Suitable mainly for companies that invest in real estate
Regular corporationOwners 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 corporationOwners 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 corporationOwners have no personal liability for malpractice of other ownersMore expensive to create than partnership or sole proprietorship
Paperwork can seem burdensome to some owners
All owners must belong to the same profession
nonprofit corporationCorporation 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 CompanyOwners 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 CompanySame 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 PartnershipMostly 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

Updated by: , J.D.

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