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Entity Advantages and Disadvantages |
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Proprietorships |
Advantages:
- Easy to form
- Simple to operate
- Easy to sell business assets
- Few administrative burdens
- No separate tax filings
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Disadvantages:
- Limited sources of capital
- No limited liability
- No structured continuity beyond the
proprietor
- All business net income is subject to
self-employment tax
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Partnerships |
Advantages:
- More sources of initial capital than
proprietorships
- More management resources
- Less administrative burdens than
corporations
- Income is generally taxed only at
partner level
- Income and loss allocations can be
flexible
- Termination can be tax-free
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Disadvantages:
- Transferring interests difficult
- No liability limitation unless a limited
partner or a limited liability partnership
- Generally, all business net income is
subject to self-employment tax
- Income tax and basis adjustment
rules are complex
- Partners are entitled to few of the tax
deductible employee fringe benefits
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Limited Liability Partnerships
(LLPs) |
Advantages:
- Favorable pass-through taxation status
- Flexibility to structure ownership
interests
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Disadvantage:
- Partners may be personally liable
for entity obligations, their own acts and
those of persons they supervise
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Limited Liability Companies
(LLCs) |
Advantages;
- Members have limited liability
- Number of members unlimited
- Members may be individuals and all types
of entities
- Double taxation is avoided
- Members generally not personally
liable for LLC debt (but personal guarantees often required of owners)
- Distributions do not have to be
proportional to owners
- Different ownership classes.
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Disadvantages:
- Limited life, often terminates on the
death or bankruptcy of a member
- Transferring interests is difficult
- Not all industries or professions can
use LLCs.
- LLC laws vary by state
- The various LLC laws are, relatively new
and untested in non-tax matters.
- Members will often be subject to
self-employment tax.
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Corporations |
Advantages:
- Can raise capital through the sale of
capital stock
- Owners have limited liability
- Unlimited corporate life
- Relatively easy to transfer ownership
interests
- Generally have more management
resources
- S corporation income taxed to
owners
- For C corporations, most dividends
taxed at a favorable 15% (or lower)
federal rate at the individual level
- C corporation owner-employees
may receive the full array of
employer-provided tax free fringe
benefits
- Distributions from S corporations usually
payroll tax free
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Disadvantages:
- C corporation income is taxed and
dividends are taxed to owners
- Administrative burdens
- Difficult to form
- Dissolution can trigger tax
- Borrowing may be hard unless
stockholders guarantee debt
- S corporations limited to 100
shareholders
- S corporations can have only one class of
stock
• S corporations can't have corporate,
partnership or nonresident alien shareholders
- S corporations generally must choose a
calendar year
- More-than-2% S shareholders pay
taxes on fringe benefits
- Tax rate on S corporation
income may be higher than for C corporation
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