By Wendy S. Enelow, CCM, MRW, JCTC, CPRW
Enelow Enterprises, Inc.
Selecting the appropriate form and structure for your business is critical. If you are to survive and thrive in our industry, which is as competitive as any other, part of your success will depend on the type of business entity you have formed and both the tax and non-tax implications of that decision. This article outlines the various business entities and key elements you should consider.
MANAGEMENT & ADMINISTRATION
- Proprietorships: Single owner; characterized by simplicity, flexibility and control
- Partnerships: General partnerships are not centralized; limited partnerships are centralized
- S Corporations: Centralized management, board of directors and corporate officers must comply with corporate legal requirements
- C Corporations: Centralized management, board of directors and corporate officers must comply with corporate legal requirements
- LLCs: Typically controlled by an operating agreement
- Proprietorships: Limited to owners’ assets and loans
- Partnerships: Sources of capital expand by virtue of number of partners involved
- S Corporations: Can issue stock for up to 35 outside shareholders
- C Corporations: Can issue stock, bonds and increase borrowing capacity; however, in the small business arena, shareholders generally have to guarantee the debt of the company
- LLCs: Generally same as partnership.
- Proprietorships: Unlimited liability
- Partnerships: General partners have unlimited liability; limited partners’ liability is limited to the dollar investment in the partnership
- S Corporations: Liability limited to assets in the corporation
- C Corporations: Liability limited to assets in the corporation
- LLCs: Investors’ liability generally limited (similar to an S or C corporation)
TRANSFERABILITY OF INTERESTS
- Proprietorships: Assets can be sold but the entity ceases upon sale
- Partnerships: Transferable subject to partners’ approval
- S Corporations: Freely transferable by sale of stock
- C Corporations: Freely transferable by sale of stock
- LLCs: Transferable subject to members’ approval
CONTINUITY OF LIFE
- Proprietorships: Finite life; ceases upon death of proprietor
- Partnerships: Terminates if 50% or more of interests are sold or exchanged within one year
- S Corporations: Indefinite life
- C Corporations: Indefinite life
- LLCs: Generally limited (like a partnership)
- Proprietorships: Must use tax year of proprietor (generally, the calendar year)
- Partnerships: Must use tax year of partners or make Section 444 election for September 30, October 31 or November 30 year-end
- S Corporations: Must use calendar year or make Section 444 selection
- C Corporations: May select any fiscal year
- LLCs: Generally same as partnerships
NOTE: Pass-through entities are NOT subject to income tax at the entity level. Rather, the owner or owners report items of income or loss on their individual income tax returns, resulting in a single level of taxation.
- Proprietorships: Pass-through entities
- Partnerships: Pass-through entities
- S Corporations: Pass-through entities
- C Corporations: Income tax is levied at the entity level and again at the shareholder level when retained earnings are distributed as dividends
- LLCs: Generally pass-through entities
COMPENSATION & PAYROLL TAXES
- Proprietorships: Self-employment earnings; pay FICA and income tax in quarterly estimated tax payments
- Partnerships: Self-employment earnings; pay FICA and income tax in quarterly estimated tax payments
- S Corporations: Wage income paid to owners-employees; income and FICA and unemployment taxes withheld. NOTE: Quarterly estimated tax payments may need to be paid if corporate income is not paid as wages, since it is taxable at shareholder level.
- C Corporations: Wage income paid by owner-employees; income and FICA taxes withheld
- LLCs: Pass-through income; pay income tax in quarterly estimated tax payments
If you’re still uncertain as to which type of business entity is best for you – based on your particular tax and non-tax considerations – it is advised that you contact a CPA who can offer personalized advice and guidance.