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S Corporation
Business Entity Pros • Liability protection similar to that of C corporations.
Pros and Cons • No double taxation of profits.
• Ownership is easily transferred through the sale of
stock.
• Separate entity from stockholders.
Limited Liability Partnership • Self-employment tax is not assessed on the entire profit
Pros • Liability protection for limited partners. of the business.
• Separate entity from partners. • Losses can offset shareholders’ other taxable income.
• Ownership can be transferred within the rules of the Cons • Complex and expensive to create and maintain.
partnership agreement. • Requires a separate tax return.
• Limited partners’ liability is limited to their investment in • Requires regular board of directors’ meetings and
the business. minutes.
• Limited partners pay self-employment tax on guaranteed • Requires tracking of basis for stockholders.
payments only. • Ownership is limited to specific types of entities.
• No double taxation of profits. • Deductibility of fringe benefits for owner-employees is
Cons • Must have one general partner with unlimited liability. limited.
• Limited liability status for damages can be lost for a Good Fit • Businesses with significant exposure to liability.
variety of administrative reasons.
• Restrictions on partners based on entity type.
• Requires a separate tax return. Business Formalities
• Requires tracking of basis for partners, both inside and
outside the partnership. A common problem with a closely-held business is fail-
Good Fit • Businesses with partners not actively involved in ure to adhere to business formalities. Trouble can occur
business. when business and personal funds are intermingled,
• Businesses with equity capital needs. the business is not adequately capitalized, or reason-
• Businesses with exposure to liability.
able compensation for services is not paid.
For example, separation of funds can be a key in pre-
C Corporation serving the liability protection of the “corporate veil.”
Pros • No liability for non-active stockholders. Courts can pierce the corporate veil if they find the cor-
• No restrictions on ownership. poration is an “alter ego” of the shareholder, which is
• Ownership can be transferred through the sale of likely to occur if shareholders pay personal expenses
stock.
• Separate entity from stockholders. from the corporation checkbook or vice versa.
• Fringe benefits for owner-officers. Transactions such as capital contributions or loans be-
• Can have ownership interest in any other business tween the business and the owners can also be rechar-
entity.
• Perpetual existence. acterized by the IRS, creating unexpected negative tax
• Raising capital can be achieved by issuing stock. consequences.
Cons • Double taxation of profits.
• Complex and expensive to create and maintain.
• Require regular board of directors’ meetings and
minutes.
• Requires a separate tax return.
Good Fit • Businesses with ownership in multiple other entities. Contact Us
• Businesses with significant exposure to liability.
• Businesses intended to exist eternally. There are many events that occur during the year that can affect
your tax situation. Preparation of your tax return involves sum-
marizing transactions and events that occurred during the prior
year. In most situations, treatment is firmly established at the
time the transaction occurs. However, negative tax effects can
be avoided by proper planning. Please contact us in advance
if you have questions about the tax effects of a transaction or
event, including the following:
• Pension or IRA distributions. • Retirement.
• Significant change in income or • Notice from IRS or other
deductions. revenue department.
• Job change. • Divorce or separation.
This brochure contains general information for taxpayers and • Marriage. • Self-employment.
should not be relied upon as the only source of authority. • Attainment of age 59½ or 70½. • Charitable contributions
Taxpayers should seek professional tax advice for more information. • Sale or purchase of a business. of property in excess of
• Sale or purchase of a residence $5,000.
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