Business Structure

The following Chart is from the National Association of Tax Professionals

Sole Proprietor
Partnership
C Corporation
S Corporation
LLC
Legal Status
Legal StatusSame entity as owner
Legal StatusSeparate entity from owner
Legal StatusSeparate entity from owner
Legal StatusSeparate entity from owner
Legal StatusSeparate entity from owner
Separate Taxable Entity from Owner
Separate Taxable Entity from OwnerNo
Separate Taxable Entity from OwnerNo
Separate Taxable Entity from OwnerYes
Separate Taxable Entity from OwnerNo
Separate Taxable Entity from OwnerDepends on tax status as sole proprietorship, partnership, or corporation
Ease of Formation
Ease of FormationVery easy
Ease of FormationPartnership agreement is helpful
Ease of FormationArticles of incorporation generally required
Ease of FormationArticles of incorporation generally required
Ease of FormationArticles of organization generally required
Management
ManagementOwner
ManagementMay be divided among partners
ManagementBoard of Directors
ManagementBoard of Directors
ManagementPer articles of organization
Continuity of Life
Continuity of LifeTerminates with death of owne
Continuity of LifeCessation of business ceasing to operate as a partnership; sale or exchange of 50% or more of the profits and capital within a 12-month period; may terminate with death of partner if agreement specifies.
Continuity of LifeContinuous
Continuity of LifeContinuous
Continuity of LifePer articles of organization
Number of Owners
Number of OwnersOne
Number of OwnersUnlimited
Number of OwnersUnlimited
Number of Owners100
Number of OwnersDepends on tax status as sole proprietorship,partnership, or corporation
Eligible Owners
Eligible OwnersIndividuals
Eligible OwnersUnlimited
Eligible OwnersUnlimited
Eligible OwnersSome limitations
Eligible OwnersDepends on tax status as sole proprietorship, partnership, or corporation
Owner Liability
Owner LiabilityUnlimited exposure
Owner LiabilityUnlimited if general partner; limited to investment if limited partnerd
Owner LiabilityLimited to investment,except for personal services
Owner LiabilityLimited to investment,except for personal services
Owner LiabilityLimited to investment, except for personal services
Transferability of Ownership
Transferability of OwnershipOnly by sale of entire business or creation of a different entity
Transferability of OwnershipCan sell all or a portion of partnership interest
Transferability of OwnershipCan sell all or a portion of stock
Transferability of OwnershipCan sell all or a portion of stock
Transferability of OwnershipPer articles of organization; commonly has some limitations
Ability to Raise Capital
Ability to Raise CapitalLimited to owners assets and borrowing ability
Ability to Raise CapitalLimited to owners assets and borrowing abilities; can sell interests to raise capital
Ability to Raise CapitalLimited to owners’contributions and corporation borrowing abilities; can sell interests to raise capital
Ability to Raise CapitalLimited to owners’contributions and corporation borrowing abilities; can sell interests to raise capital
Ability to Raise CapitalLimited to owners’contributions and LLC’s borrowing abilities; can sell interests to raise capital
Ownership Rights
Ownership RightsTotal
Ownership RightsDivided among partners
Ownership RightsDivided among shareholders
Ownership RightsDivided among shareholders
Ownership RightsDivided among memabers
Tax Year
Tax YearSame as owner
Tax YearMajority interest rules; principal partner rules; or the least aggregate deferral of income rule; exceptions may be the business purpose of §444 election
Tax YearCalendar or fiscal year
Tax YearCalendar year; §444 election; or business purpose demonstrated
Tax YearDepends on tax status as sole proprietorship, partnership, or corporation
Allocation of Income
Allocation of Income100% to owner
Allocation of IncomeBased on partnership agreement if it has substantial economic reality
Allocation of Income100% to corporation
Allocation of IncomeNormally pro-rata based on per share/per day rule
Allocation of IncomeDepends on tax status as sole proprietorship, partnership, or corporation
Tax on Formation if in Control
Tax on Formation if in ControlNo gain or loss
Tax on Formation if in ControlGain to the extent debt relief exceed basis of property transferred
Tax on Formation if in ControlNo gain if debt relief does not exceed basis of property transferred and no other assets received by transferee
Tax on Formation if in ControlNo gain if debt relief does not exceed basis of property transferred and no other assets received by transferee
Tax on Formation if in ControlDepends on tax status as sole proprietorship, partnership, or corporation
Tax on Formation if Not in Control
Tax on Formation if Not in ControlNot applicable since always in control
Tax on Formation if Not in ControlGain to the extent debt relief exceeds basis of property transferred
Tax on Formation if Not in ControlGain or loss as if sold property transferred for the FMV of the stock received
Tax on Formation if Not in ControlGain or loss as if sold property transferred for the FMV of the stock received
Tax on Formation if Not in ControlDepends on tax status as sole proprietorship, partnership, or corporation
Original Basis of Stock if Not in Control
Original Basis of Stock if Not in ControlNot applicable since always in control
Original Basis of Stock if Not in ControlBasis of property transferred less debt relief
Original Basis of Stock if Not in ControlFMV of stock received
Original Basis of Stock if Not in ControlFMV of stock received
Original Basis of Stock if Not in ControlDepends on tax status as sole proprietorship, partnership, or corporation
Basis Increases from Operations
Basis Increases from OperationsAdditional purchases or cash invested
Basis Increases from OperationsIncreased by profits, additional contributions, and increase in partner’s share of debts
Basis Increases from OperationsIncreased by additional investments
Basis Increases from OperationsIncreased by profits and additional contributions
Basis Increases from OperationsDepends on tax status as sole proprietorship, partnership, or corporation
Basis Decreases from Operations
Basis Decreases from OperationsNormal basis adjustments; depreciation, amortization, etc.
Basis Decreases from OperationsDecreased by losses, deductions, distributions, and decreases in partner’s share of debts
Basis Decreases from OperationsDecreased by nontaxable return of capital, if any
Basis Decreases from OperationsDecreased by losses,deductions, and distributions
Basis Decreases from OperationsDepends on tax status as sole proprietorship, partnership, or corporation
Deductibility of Losses
Deductibility of LossesNormal limitations, atrisk, passive
Deductibility of LossesPassed through to partners, normal limitations apply, basis, at risk, passive
Deductibility of LossesStay at corporate level, not passed through to shareholders
Deductibility of LossesPassed through to shareholders, normal limitations apply, basis, atrisk, passive
Deductibility of LossesDepends on tax status as sole proprietorship, partnership, or corporation
Nonliquidating Distributions
Nonliquidating Distributions100% belongs to owener
Nonliquidating DistributionsBased on partnership agreement
Nonliquidating DistributionsPro-rata among shares
Nonliquidating DistributionsRights must be pro-rata among shares
Nonliquidating DistributionsPro-rata among shares if a corporation; 100% if a sole proprietorship; or based on partnership agreement if a partnership
Liquidating Distributions – Owner Level
Liquidating Distributions – Owner LevelNot a separate entity; therefore all reported as part of owner’s return
Liquidating Distributions – Owner LevelGain if cash, debt forgiveness, and marketable securities exceed basis or if partner receives a disproportionate share of unrealized receivables
Liquidating Distributions – Owner LevelSold stock for value of cash and property received
Liquidating Distributions – Owner LevelSold stock for value of cash and property received
Liquidating Distributions – Owner LevelDepends on tax status as sole proprietorship, partnership, or corporation
Worthlessness of Investment
Worthlessness of InvestmentAlready has written off or capitalized all investments; loss sale of assets if sold
Worthlessness of InvestmentCapital loss of remainder of basis
Worthlessness of InvestmentCapital loss of remainder of basis; may qualify for §1244 ordinary loss treatment
Worthlessness of InvestmentCapital loss of remainder of basis; may qualify for §1244 ordinary loss treatment
Worthlessness of InvestmentDepends on tax status as sole proprietorship, partnership, or corporation
Charitable Contributions
Charitable ContributionsGenerally 50% limitation
Charitable ContributionsGenerally 50% limitation at partner level
Charitable ContributionsGenerally 10% limitation
Charitable ContributionsGenerally 50% limitation at shareholder level
Charitable ContributionsDepends on tax status as sole proprietorship, partnership, or corporation
Alternative Minimum Tax
Alternative Minimum TaxApplies at individual level
Alternative Minimum TaxApplies at partner level
Alternative Minimum TaxApplies at corporate level
Alternative Minimum TaxApplies at shareholder level
Alternative Minimum TaxDepends on tax status as sole proprietorship, partnership, or corporation
Death – Basis Adjustments
Death – Basis AdjustmentsBasis of assets is generally FMV on the date of death
Death – Basis AdjustmentsBasis of partnership interest is generally FMV on the date of death; §754 election available at partnership leve
Death – Basis AdjustmentsBasis of stock is generally FMV on the date of death
Death – Basis AdjustmentsBasis of stock is generally FMV on the date of death
Death – Basis AdjustmentsDepends on tax status as sole proprietorship, partnership, or corporation
Self-employment Tax
Self-employment TaxYes
Self-employment TaxYes if general partner, generally no if limited partner
Self-employment TaxNo, since payment for services is in the form of wages
Self-employment TaxNo, since payment for services is in the form of wages
Self-employment TaxDepends on tax status as sole proprietorship, partnership, or corporation
Salaries Paid to Family Members
Salaries Paid to Family MembersExempt from FICA for wages paid to children of owner who are under the age of 18; spouse and parents exempt from FUTA
Salaries Paid to Family MembersExempt from FICA for wages paid to children of owner who are under the age of 18 only if all partners are parents of children
Salaries Paid to Family MembersNo exemption for any family member
Salaries Paid to Family MembersNo exemption for any family member
Salaries Paid to Family MembersDepends on tax status as sole proprietorship, partnership, or corporation
Accounting Method
Accounting MethodAny method that clearly reflects income
Accounting MethodAny applicable method; cannot use cash method of partnership is a tax shelter or has a corporation as a partner
Accounting MethodAny applicable method; cannot use cash if it’s a tax shelter, required o use inventories, or hasannual gross receiptsover certain limits
Accounting MethodAny applicable method;cannot use cash if it’s a tax shelter, required o use inventories, or has annual gross receipts over certain limits
Accounting MethodDepends on tax status assole proprietorship, partnership, or corporation/div>
Fringe Benefits – Entity Level
Fringe Benefits – Entity LevelMost are nondeductible; may be able to deduct 100% of qualifying health insurance premiums
Fringe Benefits – Entity LevelMost are nondeductible; may be able to deduct 100% of qualifying health insurance premiums
Fringe Benefits – Entity LevelMost are deductible
Fringe Benefits – Entity LevelMost are nondeductible; shareholder may be able to deduct 100% of qualifying health insurance premiums
Fringe Benefits – Entity LevelDepends on tax status as sole proprietorship, partnership, or corporation
Fringe Benefits – Owner Level
Fringe Benefits – Owner LevelSee box above
Fringe Benefits – Owner LevelSee box above
Fringe Benefits – Owner LevelMost are tax free
Fringe Benefits – Owner LevelMost are taxable, although may be exempt from FICA if they are nondiscriminatory
Fringe Benefits – Owner LevelDepends on tax status as sole proprietorship, partnership, or corporation
Capital Losses
Capital LossesDeductible by the owner up to capital gains plus $3,000; excess is carried over until death
Capital LossesPassed through to partners with normal limitations applying atpartner level
Capital LossesAllowed only to the extent of capital gains.Any net capital loss for the year is carried bac three tax years as shortterm capital loss then forward five years
Capital LossesPassed through to shareholders with normal limitations applying at shareholder level
Capital LossesDepends on tax status as sole proprietorship, partnership, or corporation
Income Characterization
Income CharacterizationTreatment depends on income; ordinary income, capital gains/losses, investment income, passive, etc.
Income CharacterizationPassed through to partners; character is the same as if partner received it directly
Income CharacterizationDividend income when reported to shareholder
Income CharacterizationPassed through to shareholders, character is the same as if shareholder received it directly
Income CharacterizationDepends on tax status as sole proprietorship, partnership, or corporation
Exempt Income (i.e., municipal bond interest)
Exempt Income (i.e., municipal bond interest)Exempt
Exempt Income (i.e., municipal bond interest)Passed through topartners; retains character as exempt
Exempt Income (i.e., municipal bond interest)Remains exempt for income tax, may be subject to AMT
Exempt Income (i.e., municipal bond interest)Passed through to shareholders; retains character as exempt
Exempt Income (i.e., municipal bond interest)Depends on tax status as sole proprietorship, partnership, or corporation
Retirement Plans
Retirement PlansAny retirement plan, including SEPs, SIMPLEs, Keoghs, solo-401(k)
Retirement PlansAny retirement plan, including SEPs, SIMPLEs, Keoghs, 401(k); must be established at partnership level; contributions passed through to partner and deductible by partner
Retirement PlansAny retirement plan except Keogh; deductible at corporate level
Retirement PlansAny retirement plan except Keogh; deductible at corporate level; must be established at S corporation level
Retirement PlansDepends on tax status as sole proprietorship, partnership, or corporation

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