TYPE

ADVANTAGES

DISADVANTAGES

SOLE PROPRIETOR

- Schedule C

- Schedule F

Easiest business to organize

Owner free to make decisions

Minimum legal restrictions

Owner receives all profits

Business is easy to discontinue

If owner materially participates, losses can offset other income

Unlimited liability for the owner

Limited ability to raise capital

Skills limited to owner's abilities

Income tax cannot be deferred by retaining profits

PARTNERSHIP

- Form 1065

Easy to organize

Better financial strength than sole proprietor

Combines skills and judgements of more than 1 person

Has legal status

Each partner has individual interest in business

Losses can offset other income if partner materially participates

Unlimited liability for partners

Authority for decisions is divided

Income tax cannot be deferred by retaining profits

CORPORATION

- Form 1120

Life of business is perpetual

Stockholders have limited liability, though courts may disregard "corporate liability shield" in case of single shareholder corporations

Transfer of ownership easy through sale of stock

Easy to raise capital

Shared management

Adaptable to small and large businesses

Tax-free fringe benefits for owner / employees

Double taxation. Profits are taxed at corporate level and dividends distributed to shareholders are taxed at individual level

Difficult and expensive to organize

Corporate charter restricts types of business activities

Subject to many federal & state controls

S CORPORATION

- Form 1120S

Double taxation of earnings avoided

Same limited liability as C Corporation, though courts may disregard "corporate liability shield" in case of single shareholder corporations

Pass through of profits not subject to self-employment tax as in a partnership

Fringe benefits restricted

Shareholders pay tax on undistributed profits

Less flexibility of choosing tax year

Number of shareholders limited to 100

LLC

- Form 1065

Same limited liability as corporations

S Corporation restrictions on number of owners doesn't apply

Can be owned by corporations

Must have at least 2 owners for federal tax purposes (S Corporations can have 1 owner)

Earnings may be subject to self-employment tax

Income tax cannot be deferred by retaining profits

Life of LLC may be limited