Menu Close

Entity Comparison – What Should You Form?

A comparison of the  tax advantages and disadvantages of a corporations versus  sole proprietorships, partnerships, LPs, LLCs, and LLPs:

 

  Corporation Sole Proprietor / Partnership / LLC / LLP
Borrowing from retirement plan permitted Yes, subject to certain limitations No
Retirement plan contribution limited to earnings from business for which plan was established No Yes
Additional limitation on deducting retirement plan contributions used to purchase insurance No Yes
Limitation on forward averaging for certain distributions from retirement plan No Yes
Possible net operating loss from plan contributions Yes No
May acquire basis in retirement plan life insurance Yes No
Interest in retirement plan forfeitures Yes No
Entitled to $10,000 minimum funding for defined benefit plans Yes No
Entitled to qualified health plan participation Yes No
Entitled to qualified sickness, accident, or disability wage continuation plan participation Yes No
Entitled to qualified group term life insurance plan participation Yes No
Entitled to $5000 qualified death benefit Yes No, but similar amount available from qualified retirement plan
70-percent dividend received deduction available Yes No
Clear separation of personal and business expenses Yes No
IRC §303 stock redemption treatment available Yes No
Unlimited liability No Yes (No for limited liability partnership)
Unreasonable compensation problem Yes No
IRS may, under some circumstances, disregard corporate entity for tax purposes Yes No
May be subject to double taxation Yes No
Subject to tax on unreasonable accumulation of earnings and profits Yes No
May be subject to personal holding company tax Yes No
Must pay Federal Unemployment Tax Act (IRC §§3301-3311) taxes Yes No
Must pay California unemployment taxes and workers’ compensation premiums Generally No
Must pay minimum California franchise tax annually Yes Depends
May be subject to income bunching on incorporation Yes No
Corporation may have to capitalize partnership retirement payment obligations it assumes Yes Not applicable
Higher tax cost of liquidation Yes Depends
Must pay social security taxes Yes Yes
Net operating loss limitations Yes No
Passive activity loss limitations Yes No
Expense payments to employees may be reclassified as constructive dividends Yes Not applicable
May be subject to additional reporting rules Yes Yes
Alternative minimum tax on buy-sell agreements funded by corporate-owned life insurance Yes Not applicable
Can zero out taxable income Yes, but difficult Yes
S corporation election Yes Not applicable
Higher legal and accounting costs Yes No
Professional employees must respect financial separateness of corporation Yes No (Yes for limited liability partnership)