Question

What are the benefits/downfalls of being a corporation vs partnership vs sole proprietorship for tax and legal purposes?

If you create an LLC do you default to a partnership or corporation for tax purposes? Can an LLC be both?

Do corporations and partnerships both pay tax?

Answer 1

^{1.Sole Proprietorship}

A sole proprietorship is a business owned by a single individual. This person collects all the profit from the business and is liable for its debt.

Advantages

A sole proprietorship is the simplest and least expensive business to start and operate. Because the owner and the business are one and the same, all of the income and expenses go straight to the owner. The owner then reports those on their personal income tax forms.

Disadvantages

In a sole proprietorship, there’s legally no difference between the business and the owner. Therefore, all of the owner’s private possessions are at risk if they are needed to pay the business’s debts.

2.Partnership

A partnership is a business wherein two or more individuals share the management, profit and liability for the company’s debts.

Advantages

Like a sole proprietorship, a partnership is simple to set up and run.

Disadvantages

Just like a sole proprietorship, the partners assume all liability for the debts incurred by the partnership. In addition, the partners may become deadlocked and unable to cooperate in the running of the business.

3.Corporation

A corporation is a legally defined type of business in which the business itself is considered a “person” under the law. The corporation itself is liable for the business’s debts. This relieves the corporations owners of much of their own personal liability.

Advantages

Owners of the corporation, called shareholders, have a limited liability. They risk only the money they have invested in the corporation. Shareholders can also sell their shares to someone else. In this way, they can end their ownership of the business.

Disadvantages

The primary disadvantage of corporations is the difficulty and expense involved in starting them. To a lesser degree, they are also difficult and expensive to operate. Corporations are governed under state laws. They must therefore follow specific rules and procedures for record-keeping and reporting.

In addition, in some kinds of corporations, called subchapter C corporations, the corporation pays taxes on the money it earns. The shareholders pay tax on the dividends the corporation pays out.

Subchapter S corporations and limited liability companies are other kinds of corporations. They are more complex than sole proprietorships and partnerships. However, they are generally less onerous than other corporations to start and operate. They both offer more limits on liabilities than sole proprietorships and partnerships.

LLC do you default to a partnership or corporation for tax purposes

An LLC is an entity created by state statute. Depending on elections made by the LLC and the number of members, the IRS will treat an LLC either as a corporation, partnership, or as part of the owner’s tax return . Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

Do corporations and partnerships both pay tax

Partnership Tax Rules

A partnership is a business structure where ownership and management responsibility of a company is split between two or more individuals. A partnership is not a legal entity that is separate from the owners and therefore the partnership itself does not pay taxes. The Internal Revenue Service says that under a partnership structure, the profits a business earns flow directly to the personal income tax returns of the owners. For example, if a partnership with two owners makes $500,000 in profit and the owners split profits equally, each would have to report $250,000 in income on their personal tax returns. Partners are responsible for paying self-employment taxes on business income.

Corporation Tax Rules

A corporation is a business that is owned by a group of shareholders who purchase stock in the company. A corporation is a legal entity that is separate from the owners for tax purposes. According to the IRS, the corporations pay income taxes on profits when they are earned. Unlike the owners of partnerships, shareholders are not responsible for paying taxes on the profits a corporation earns. Shareholders of corporations are not subject to self-employment taxes.