From the Nolo eCommerce Center

Type of Entity Main Advantages Main Drawbacks
Sole Proprietorship Simple and inexpensive to create and operate

Owner reports profit or loss on his or her personal tax return

Owner personally liable for business debts
General Partnership Simple and inexpensive to create and operate

Owners (partners) report their share of profit or loss on their personal tax returns

Owners (partners) personally liable for business debts
Limited Partnership Limited 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 business

General partners personally liable for business debts

More expensive to create than general partnership

Suitable mainly for companies that invest in real estate

Regular Corporation Owners 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 Corporation Owners 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 Corporation Owners have no personal liability for malpractice of other owners More expensive to create than partnership or sole proprietorship

Paperwork can seem burdensome to some owners

All owners must belong to the same profession

Nonprofit Corporation Corporation 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 Company Owners 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 Company Same 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 Partnership Mostly 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

Click here for related information and products from Nolo

© 2002 Nolo