Chart of Entity Comparison

Sole Proprietor Partnership C Corporation S Corporation LLC

Legal Status Same entity as owner Separate entity from Separate entity from Separate entity from Separate entity from
owner owner owner owner

Separate Taxable No No Yes No Depends on tax status as

Entity from Owner sole proprietorship,
partnership, or corporation

Ease of Formation Very easy Partnership agreement is Articles of incorporation Articles of incorporation Articles of organization
helpful generally required generally required generally required

Management Owner May be divided among Board of Directors Board of Directors Per articles of organization
partners

Continuity of Life Terminates with death of Cessation of business; Continuous Continuous Per articles of organization
owner ceasing to operate as a
partnership; sale or
exchange of 50% or more
of the profits and capital
within a 12-month period;
may terminate with death
of partner if agreement
specifies.

Number of Owners One Unlimited Unlimited 100 Depends on tax status as

sole proprietorship,
partnership, or corporation

Eligible Owners Individuals Unlimited Unlimited Some limitations Depends on tax status as
sole proprietorship,
partnership, or corporation

Owner Liability Unlimited exposure Unlimited if general Limited to investment, Limited to investment, Limited to investment,
partner; limited to except for personal except for personal except for personal
investment if limited services services services
partner

Transferability of Only by sale of entire Can sell all or a portion of Can sell all or a portion Can sell all or a portion of Per articles of
Ownership business or creation of a partnership interest of stock stock organization; commonly
different entity has some limitations

Ability to Raise Limited to owners assets Limited to owners assets Limited to owners’ Limited to owners’ Limited to owners’
Capital and borrowing ability and borrowing abilities; contributions and contributions and contributions and LLC’s
can sell interests to raise corporation borrowing corporation borrowing borrowing abilities; can sell
capital abilities; can sell abilities; can sell interests interests to raise capital
interests to raise capital to raise capital

© 2010 National Association of Tax Professionals

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 Sole Proprietor Partnership C Corporation S Corporation LLC
Ownership Rights Total Divided among partners Divided among Divided among Divided among members
shareholders shareholders

Tax Year Same as owner Majority interest rules; Calendar or fiscal year Calendar year; §444 Depends on tax status as
principal partner rules; or election; or business sole proprietorship,
the least aggregate purpose demonstrated partnership, or corporation
deferral of income rule;
exceptions may be the
business purpose of §444
election

Allocation of Income 100% to owner Based on partnership 100% to corporation Normally pro-rata based Depends on tax status as
agreement if it has on per share/per day rule sole proprietorship,
substantial economic partnership, or corporation
reality

Tax on Formation if No gain or loss Gain to the extent debt No gain if debt relief No gain if debt relief does Depends on tax status as
in Control relief exceed basis of does not exceed basis of not exceed basis of sole proprietorship,
property transferred property transferred and property transferred and partnership, or corporation
no other assets received no other assets received
by transferee by transferee

Tax on Formation if Not applicable since Gain to the extent debt Gain or loss as if sold Gain or loss as if sold Depends on tax status as
Not in Control always in control relief exceeds basis of property transferred for property transferred for sole proprietorship,
property transferred the FMV of the stock the FMV of the stock partnership, or corporation
received received

Original Basis of Not applicable since Basis of property FMV of stock received FMV of stock received Depends on tax status as
Stock if Not in always in control transferred less debt sole proprietorship,
Control relief partnership, or corporation

Basis Increases from Additional purchases or Increased by profits, Increased by additional Increased by profits and Depends on tax status as
Operations cash invested additional contributions, investments additional contributions sole proprietorship,
and increase in partner’s partnership, or corporation
share of debts

Basis Decreases Normal basis Decreased by losses, Decreased by Decreased by losses, Depends on tax status as
from Operations adjustments; deductions, distributions, nontaxable return of deductions, and sole proprietorship,
depreciation, and decreases in capital, if any distributions partnership, or corporation
amortization, etc. partner’s share of debts

Deductibility of Normal limitations, at- Passed through to Stay at corporate level, Passed through to Depends on tax status as
Losses risk, passive partners, normal not passed through to shareholders, normal sole proprietorship,
limitations apply, basis, at shareholders limitations apply, basis, at partnership, or corporation
risk, passive risk, passive

Nonliquidating 100% belongs to owner Based on partnership Pro-rata among shares Rights must be pro-rata Pro-rata among shares if a
Distributions agreement among shares corporation; 100% if a sole
proprietorship; or based on
partnership agreement if a
partnership

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 Sole Proprietor Partnership C Corporation S Corporation LLC
Liquidating Not a separate entity; Gain if cash, debt Sold stock for value of Sold stock for value of Depends on tax status as
Distributions - therefore all reported as forgiveness, and cash and property cash and property received sole proprietorship,
Owner Level part of owner’s return marketable securities received partnership, or corporation
exceed basis or if partner
receives a
disproportionate share of
unrealized receivables

Worthlessness of Already has written off Capital loss of remainder Capital loss of remainder Capital loss of remainder Depends on tax status as
Investment or capitalized all of basis of basis; may qualify for of basis; may qualify for sole proprietorship,
investments; loss sale of §1244 ordinary loss §1244 ordinary loss partnership, or corporation
assets if sold treatment treatment

Charitable Generally 50% limitation Generally 50% limitation Generally 10% limitation Generally 50% limitation Depends on tax status as
Contributions at partner level at shareholder level sole proprietorship,
partnership, or corporation

Alternative Minimum Applies at individual Applies at partner level Applies at corporate Applies at shareholder Depends on tax status as
Tax level level level sole proprietorship,
partnership, or corporation

Death - Basis Basis of assets is Basis of partnership Basis of stock is Basis of stock is generally Depends on tax status as
Adjustments generally FMV on the interest is generally FMV generally FMV on the FMV on the date of death sole proprietorship,
date of death on the date of death; date of death partnership, or corporation
§754 election available at
partnership level

Self-employment Yes Yes if general partner, No, since payment for No, since payment for Depends on tax status as
Tax generally no if limited services is in the form of services is in the form of sole proprietorship,
partner wages wages partnership, or corporation

Salaries Paid to Exempt from FICA for Exempt from FICA for No exemption for any No exemption for any Depends on tax status as
Family Members wages paid to children of wages paid to children of family member family member sole proprietorship,
owner who are under the owner who are under the partnership, or corporation
age of 18; spouse and age of 18 only if all
parents exempt from partners are parents of
FUTA children

Accounting Method Any method that clearly Any applicable method; Any applicable method; Any applicable method; Depends on tax status as
reflects income cannot use cash method cannot use cash if it’s a cannot use cash if it’s a tax sole proprietorship,
of partnership is a tax tax shelter, required o shelter, required o use partnership, or corporation
shelter or has a use inventories, or has inventories, or has annual
corporation as a partner annual gross receipts gross receipts over certain
over certain limits limits

Fringe Benefits - Most are nondeductible; Most are nondeductible; Most are deductible Most are nondeductible; Depends on tax status as
Entity Level may be able to deduct partner may be able to shareholder may be able to sole proprietorship,
100% of qualifying deduct 100% of qualifying deduct 100% of qualifying partnership, or corporation
health insurance health insurance health insurance premiums
premiums premiums

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 Sole Proprietor Partnership C Corporation S Corporation LLC
Fringe Benefits - See box above See box above Most are tax free Most are taxable, although Depends on tax status as
Owner Level may be exempt from FICA sole proprietorship,
if they are partnership, or corporation
nondiscriminatory

Capital Losses Deductible by the owner Passed through to Allowed only to the Passed through to Depends on tax status as
up to capital gains plus partners with normal extent of capital gains. shareholders with normal sole proprietorship,
$3,000; excess is carried limitations applying at Any net capital loss for limitations applying at partnership, or corporation
over until death partner level the year is carried back shareholder level
three tax years as short-
term capital loss then
forward five years

Income Treatment depends on Passed through to Dividend income when Passed through to Depends on tax status as
Characterization income; ordinary partners; character is the reported to shareholder shareholders, character is sole proprietorship,
income, capital same as if partner the same as if shareholder partnership, or corporation
gains/losses, investment received it directly received it directly
income, passive, etc.

Exempt Income (i.e., Exempt Passed through to Remains exempt for Passed through to Depends on tax status as
municipal bond partners; retains income tax, may be shareholders; retains sole proprietorship,
interest) character as exempt subject to AMT character as exempt partnership, or corporation

Retirement Plans Any retirement plan, Any retirement plan, Any retirement plan Any retirement plan except Depends on tax status as
including SEPs, SIMPLEs, including SEPs, SIMPLEs, except Keogh; Keogh; deductible at sole proprietorship,
Keoghs, solo-401(k) Keoghs, 401(k); must be deductible at corporate corporate level; must be partnership, or corporation
established at partnership level established at S
level; contributions corporation level
passed through to partner
and deductible by partner

Note: This chart is intended for informational purposes only and may not include all aspects of tax law. When choosing a
business entity, extreme care must be taken to ensure all federal and state laws are being followed.

© 2010 National Association of Tax Professionals

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