Use this chart to quickly compare entity characteristics before you incorporate. For additional information on business types, taxation, comparisons and corporation types, please visit the following links:
- All Business Entity Types Defined
- Compare the S Corporation to the LLC
- Corporation Types Explained
- Corporation vs. LLC Taxation
| Sole Proprietor | C Corporation | S Corporation | LLC | |
|---|---|---|---|---|
| Lawsuit protection for owners when business is sued? | NO | YES | YES | YES |
| Asset protection for business assets when owner is sued? | NO | NO | NO | YES |
| Additional business tax deductions available? | NO | YES | YES | YES |
| Who is taxed on business profits? | Owner | Corporation | Shareholder | Your choice – Owner or Company |
| When to use? | Not recommended | Own a business, to take advantage of lower corporate corporate taxes compared to individual income taxes, publicly traded company, to deduct medical expenses. | Own a business where the owner will disburse most of the corporate profits to himself/herself. | To own real estate. To hold cash for asset protection. To own the stock in one’s corporations. |
| Benefits | Few – high liability and fewer tax deductions than alternatives listed here. | Only 15% corporate tax on the first $50,000 of income. | Save 15.3% on taxes. Pay self a small but reasonable salary and pay the rest as a “distribution to shareholders” to save the 12.4% Social Security and 2.9% Medicare for a total savings of 15.3% on this portion of income. | When owner (member) is sued there are provisions in the law to protect assets held inside of the LLC from being seized. |
| Taxation | As a sole proprietorship – all income flows through to owner. | Corporation pays its own taxes after deductions. (All “for profit” corporations are taxed as C corporations by default.) | Shareholders pay the taxes after deductions. (Must file an election to attain S corporation status). Shareholders can only be US citizens or resident aliens. | Your choice. Can be taxed as a sole proprietorship, partnership, C corporation or S corporation. By default – taxed as sole proprietorship ** if only one owner, as a partnership if two or more owners. File a tax form to be taxed as a C corporation and an additional form to be taxed as an S corporation |
| Ownership | Sole proprietor | Shareholder | Shareholder | Member |
| Leadership | Sole proprietor | Officer/Director (can generally be same person) | Officer/Director (can generally be same person) | Manager/Member (can generally be same person) |
| Raising Capital | Borrow money that is typically guaranteed personally | Sell shares of stock to raise capital without personal guarantee of owners (subject to applicable laws) | Sell shares of stock to raise capital without personal guarantee of owners (subject to applicable laws) | Sell membership interest to raise capital without personal guarantee of owners (subject to applicable laws) |
| Guideline Documents | None | Bylaws | Bylaws | Operating Agreement |
| Ownership Documents | None | Shares | Shares | Operating agreement / Membership Units |
| Double taxation required? | NO | NO – only if dividends are paid. Thus, pay salaries and bonuses rather than dividends. | NO | NO |
| Can business deduct salaries to owner? | NO – business and owner are one in the same for tax purposes. | YES | YES | YES |
* The letters “C” and “S” represent chapters in the IRS tax code. C corporations and S corporations are not types of corporations but types of corporate taxation.
** How an entity is taxed and how it protects the owner from lawsuits are two separate issues. For example, a sole proprietorship does not offer lawsuit protection for the owners. However, an LLC that is taxed as a sole proprietorship can.
