MAKING THE RIGHT CHOICE

Compare S corporations, C corporations, limited liability companies, and partnerships in 17 Key Areas

s corporation, c corporation, llc, partnership, compare business entities

Choose the section below by topic to compare the four most common types of business entities. By selecting which attributes are most important to you in each section, you will be well on your way to choosing the right entity for you.

1. Tax Rate

C CORPORATION: Graduated tax rates of up to 35% apply to taxable income over $18.3 million. Personal service corporations are taxed at the 35% rate on all income.

S CORPORATION: There is no tax to the S corporation except in two limited circumstances: 1) Recognized built-in gains, and 2) Excess passive net income.

LLC: There is no tax to the LLC on LLC income. All items of income, gain or loss pass through and are taxed to the members.

PARTNERSHIP: There is no tax to the partnership for partnership income. All items of income, gain or loss pass through and are taxed to the partners.

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2. Eligible Owners

C CORPORATION: There are no restrictions on eligible owners.

S CORPORATION: An S corporation may not have more than 100 shareholders. It may not have non-individual shareholders, subject to certain exemptions.

LLC: There are no restrictions on eligible owners.

PARTNERSHIP: There are no restrictions on eligible owners.

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3. Type of Ownership Interest

C CORPORATION: Stock. There may be different classes of stock.

S CORPORATION: Stock. There may be only one class of stock. However there may be voting and nonvoting common stock.

LLC: Membership Interests. There may be different classes of membership interests.

PARTNERSHIP: General and Limited partnership units. There may be different classes of partnership interests.

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4. Special Allocations

C CORPORATION: Special allocations are not permitted. Dividends must be paid on stock ownership.

S CORPORATION: Special allocations are not permitted. Income, gain, and loss all pass through to the shareholders based on stock ownership.

LLC: Special allocations are permitted if the allocations have substantial economic effect.

PARTNERSHIP: Special allocations are permitted if the allocations have substantial economic effect.

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5. Liability of Owners

C CORPORATION: There is limited liability for shareholders, officers and directors. This protection is generally extended to agents and employees as well.

S CORPORATION: There is limited liability for shareholders, officers and directors. This protection is generally extended to agents and employees as well.

LLC: There is limited liability for members and managers. This protection is generally extended to agents and employees as well.

PARTNERSHIP: All partners in a general partnership are personally liable without limits. The general partner in a limited partnership is personally liable without limits. There is limited liability for limited partners in a limited partnership to the extent that they do not act as a general partner in assuming management responsibilities of the partnership.

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6. Transferability of Ownership Interest

C CORPORATION: Shares may be freely transferred, and with proper registration and reporting may be traded publicly.

S CORPORATION: Shares may be freely transferred only to eligible S corporation shareholders. Limitations on the number of eligible shareholders prevents shares from being publicly traded.

LLC: There may be restrictions on transfer under state law

PARTNERSHIP: Partnership interests may be transferred according to the terms of the partnership agreement. Generally, a general partnership interest may not be transferred without the consent of the other partners.

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7. Duration

C CORPORATION: A C corporation continues indefinitely.

S CORPORATION: An S corporation continues indefinitely.

LLC: An LLC dissolves at the time specified in the operating agreement, or upon the loss of a member (unless the other members agree to continue the LLC).

PARTNERSHIP: A partnership terminates at the time specified in the partnership agreement or when there is more than a 50% change in partnership interests during any 12 month period.

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8. Management

C CORPORATION: Managed by officers and directors.

S CORPORATION: Managed by officers and directors

LLC: Managed either by all members, or by specifically designated managers. Members who participate in management are not personally liable.

PARTNERSHIP: Managed by general partners. Limited partners who participate in management are personally liable.

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9. Liabilities and Basis

C CORPORATION: Liabilities incurred by the corporation do not increase the shareholder's basis in the stock.

S CORPORATION: Liabilities incurred by the corporation do not increase the shareholder's basis in the stock.

LLC: Liabilities incurred by the LLC increase a member's basis in his/her membership interest.

PARTNERSHIP: Liabilities incurred by the partnership increase a partner's basis in his/her partnership interest.

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10. Pass-Through of Losses

C CORPORATION: Losses of a C corporation mat not be passed through to or be deducted by shareholders.

S CORPORATION: Losses of an S corporation may be passed through to and be deducted by shareholders, subject to certain restrictions, including the basis, at-risk and passive loss limitations.

LLC: Losses of an LLC may be passed through to and be deducted by members, subject to certain restrictions, including basis, at-risk and passive loss limitations.

PARTNERSHIP: Losses of a partnership may be passed through to and be deducted by partners, subject to certain restrictions, including basis, at-risk and passive loss limitations.

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11. Fringe Benefits

C CORPORATION: Owner-employees are eligible for most fringe benefits.

S CORPORATION: 2% shareholders are eligible for most fringe benefits.

LLC: Members are ineligible for certain fringe benefits.

PARTNERSHIP: Partners are ineligible for certain fringe benefits.

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12. Tax Upon Sale of Appreciated Assets

C CORPORATION: There is potential double taxation. There is a tax imposed at the corporate level upon the sale or distribution of appreciated assets. Additionally, there is a potential dividend or capital gains tax upon the distribution of sale proceeds to shareholders.

S CORPORATION: There is a single tax at the shareholder level upon the sale of appreciated assets. There is also a potential built-in gains tax at the corporate level if the corporation had appreciated property at the time of conversion from a C corporation to an S corporation.

LLC: There is a single tax at the member level upon the sale of appreciated assets. Generally, there is no tax upon the distribution of appreciated assets.

PARTNERSHIP: There is a single tax at the partner level upon the sale of appreciated assets. Generally, there is no tax upon the distribution of appreciated assets.

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13. Tax to Entity Upon Liquidation

C CORPORATION: The corporation is taxed on appreciation in assets upon the sale or distribution of assets. This may result in double taxation as these proceeds are distributed to shareholders.

S CORPORATION: There is no tax to the corporation except for a potential built-in gains tax if a C corporation was converted to an S corporation in the prior 10 years.

LLC: There is no tax to the LLC upon the sale or distribution of assets. Gain upon the sale of assets passes to the members.

PARTNERSHIP: There is no tax to the partnership upon the sale or distribution of assets. Gain upon the sale of assets passes to the partners.

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14. Tax to Owners Upon Liquidation

C CORPORATION: Gain is recognized to the extent that fair market value of property distributed exceeds the shareholder's basis in his/her stock.

S CORPORATION: Gain is recognized to the extent that the fair market value of property distributed exceeds the shareholder's basis in his/her stock.

LLC: Gain realized upon the liquidating sale of appreciated assets by the LLC passes to the members. No gain is recognized upon distribution except to the extent that the money distributed exceeds the member's basis in his membership interest.

PARTNERSHIP: Gain realized upon the liquidating sale of appreciated assets by the partnership passes to the partners. No gain is recognized upon distribution except to the extent that the money distributed exceeds the partners basis in his partnership units.

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15. Single Owner Issues

C CORPORATION: A C corporation may have a single shareholder.

S CORPORATION: An S corporation may have a single shareholder.

LLC: Single-members LLCs are disregarded entities for federal tax purposes. Some states require a minimum of two members. Charging order protection for the LLC member is challenged because there are no innocent members to protect.

PARTNERSHIP: A single partner partnership is called a sole proprietorship.

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16. Charging Order Protection

C CORPORATION: Charging order protection is not available for shareholders except in Nevada, subject to certain limitations.

S CORPORATION: Charging order protection is not available for shareholders except in Nevada.

LLC: Charging order protection generally applies to innocent members.

PARTNERSHIP: Charging order protection generally applies to innocent partners.

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17. Self-Employment Taxes

C CORPORATION: Shareholder-employees are not subject to self-employment tax. The corporation pays the employer's portion of the withholding tax which equals the self-employment tax. Self-employment tax does not apply dividends or distributions paid to shareholders.

S CORPORATION: S corporation shareholders do not pay self-employment taxes on dividends. They pay self employment tax only on salary payments, provided they receive reasonable compensation for their services. It is generally thought that an S corporation can save a substantial amount of self-employment taxes in many cases when compared to LLC members in the same economic circumstance.

LLC: Managers may be subject to self-employment taxes on their distributive portion of income, whether or not distributed.

PARTNERSHIP: Limited partners are not subject to self-employment taxes except for guaranteed payments for services to the partnership. General partners may be subject to self-employment taxes.

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