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Cell Phone: 316-648-7551
What are the advantages and disadvantages of the following:
1040/Schedule
C, 1065/Schedule C, 1065/Partnership,
1120C Corporation, 1120S Corporation and Limited Liability Company?
ENTITY COMPARISON
CHART
|
| |
Sole Proprietorship |
Partnership |
Corporation
|
S Corporation
|
Limited Liability
Company
|
| IRS Pub |
334 |
541 |
542 |
589 |
541 |
|
IRS Form
|
Sch.C, Form 1040
|
Form 1065
|
Form 1120C
|
Form 1120S
|
Form 1065
|
|
Organization
&
Administration
|
Easiest business to organize. Allows complete
intermingling of business and personal funds (although this is not recommended).
Partnerships and corporations cannot intermingle business with personal
funds. Business return is filed along with the owners individual income
tax return.
|
Easy to organize.
A written partnership agreement is recommended, but not required. The partnership
agreement determines how income and losses are allocated to the partners.
If a partnership agreement does not exist, partnership items pass through
based on the partners' ownership interests. |
Difficult and expensive to organize. Must
hold periodic board meetings and keep minutes. Must comply with federal
and state regulations.
|
Set up as a regular
corporation. Must make election to be treated as an S corporation. Certain
events will cause automatic termination of S status. |
An existing partnership can generally register for LLC
status in the state in which it conducts business.
Registration is generally less complicated than forming
a corporation.
|
|
Bookkeeping
&
Accounting
|
Fewer
requirements on what type of bookkeeping system or accounting method is
used. The system must be consistent; clearly show income and expenses; and
allow the taxpayer to file an accurate return. The sole proprietorship must
follow the same tax year as the owner |
Depending
on income and assets, the partnership may be required to include a balance
sheet with its income tax return. Therefore, the partnership should use
the double entry method for bookkeeping purposes. If a partner exchanges
property other than cash in exchange for an interest in a partnership, special
accounting rules must be applied |
The
balance sheet on the corporation's tax return must agree with the corporate
books. The corporation must use a double entry bookkeeping system. The corporation
must file all necessary employment tax returns. |
Must
use double entry bookkeeping. Must file all required payroll tax and reporting
forms. |
Same
as a partnership |
|
Owner Control
and Flexibility
|
Owner
is free to make all business decisions |
Control
of the business operations is divided among partners. |
Shareholders
have control over the corporation to the extent that they own voting stock. |
Shareholders
have control over the corporation to the extent that they own voting stock. |
Control
is divided among members. |
| Transfer
of Ownership |
A sole
proprietorship is not a separate entity from its owner. "Sale"
of a sole proprietorship is actually a sale of assets. |
The partnership
agreement may restrict the sale of a partnership interest, and may control
the terms of the sale. |
Ownership
is easily transferred by selling shares of stock. The corporate charter
may place certain restrictions on the sale of stock by shareholders. |
Ownership
is transferred by sale of stock. The corporate charter may place certain
restrictions on the sale of stock by shareholders. |
The operating
agreement may restrict transfer of ownership interest. |
|
Advantages
&
Disadvantages
|
Advantages:
-Minimum legal restrictions.
-Easy to discontinue
Disadvantages:
-Unlimited liability.
-May not bring in new owners or outside capital contributions.
-Income tax cannot be deferred by retaining profits.
|
Advantages:
-A partnership can be a good way to combine the skills and/or financial
abilities of several different people
Disadvantages:
-A partnership is often easier to get into than out of.
-General partners are liable for actions of other partners.
|
Advantages:
-Limited liability.
-Perpetual life.
-Ability to raise capital through issuance of stock
-Ease of transfer of ownership.
Disadvantages:
-Double taxation of profits.
-Corporate charter restricts types of business activities.
-Subject to various state and federal controls.
|
Advantages:
-Limited liability.
-Avoids double taxation of profits.
-Profits passed through are not subject to SE tax as in a partnership
Disadvantages:
-Shareholders pay tax on earnings even if undistributed.
-Less flexibility in choosing a tax year.
-Contribution limits to a qualified retirement plan are based on employee/shareholder's
wages, not overall profits such as sole proprietor.
|
Advantages:
-Avoids certain S corporation restrictions.
-Avoids double taxation of profits.
Disadvantages:
-Inconsistent treatment state to state.
-Must have at least two owners.
-Relatively new business entity with little regulatory or case law to
follow.
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office. We would be glad to serve you in any way that we can.
Copyright
2006 - Buellesfeld Financial Services, Inc.
Registered Investment Advisor
J. P. Buellesfeld, President
221 West Harvey, Suite 108,
U. S. Post Office Building
Wellington, Kansas 67152-3843
Phone: (620) 326-7551; 326-6702
Cell Phone: 316-648-7551
Wichita:
(316) 648-7551 E-Fax: 413-740-5896
Last updated on 29 Nov 2009 - Sherry Kline