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When the IRS Calls . . .

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Comparison of Business Entitites

Characteristics Sole Proprietorship General Partnership Limited Liability Company S Corp Corporation
Formation Just one owner. No state filing required Two or more owners, called partners. No state filing required. State filing required; most states do not require more than one owner. Owners are called members State filing required. One or more owners, called shareholders. Restrictions on who can be an owner. State filing required. One or more owners, called shareholders.
Duration of Existence Dissolved if sole proprietor ceases doing business or dies Dissolves upon death or withdrawal of a partner unless safeguards are in place in a partnership agreement. Most states allow perpetual duration. Perpetual Perpetual
Liability Sole proprietor has unlimited liability All partners have unlimited liability Members not typically personally  liable for the debts of the LLC, beyond the amount they invest in the LLC. Shareholders are typically not personally liable for the debts of the corporation beyond the amount they invest in the corporation. Shareholders are typically not personably liable for the debts of the corporation beyond the amount they invest in the corporation.
Operational Requirements Relatively few legal formalities. Relatively few legal formalities. Some formal requirements but less formal than corporations. Board of directors, officers, annual meetings, and annual reporting required Board of directors, officers, annual meetings, and annual reporting required
Management Sole proprietor has full control of management and operations Typically each partner has an equal voice, unless they have agreed otherwise. Members have an operating agreement (called regulations in Texas) that outlines management Managed by the directors, who are elected by the shareholders Managed by the directors, who are elected by the shareholders
Taxation Not a taxable entity. Sole proprietor pays all taxes Not a taxable entity. Each partner pays tax on his/her share of income and can deduct losses against other sources of income Members can elect to be taxed either as a partnership or a corporation. No tax at the entity level. Income/loss is passed through to the shareholders Taxed at the entity level. Also, If dividends are distributed to shareholders, dividend income is taxed at the individual level.
Pass Through Income/Loss Yes Yes Yes or No, depending on the election made by the members. Yes No
Double Taxation No No Yes or No, depending on the election made by the members. No Yes, if income is distributed to shareholders in the form of dividends.
Cost of Creation None None State filing fee required State filing fee required State filing fee required
Raising Capital Often difficult unless individual contributes funds Contributions can be made from partners, and more partners can be added Possible to sell interests, though subject to operating agreement restrictions Shares of stock may be sold to raise capital Shares of stock may be sold to raise capital
Transferability of Interest No No Possibly, depending on restrictions outlined in the operating agreement Yes, but must observe IRS regulations on who can own stock Shares of stock are easily transferred, in the absence of a Shareholder’s agreement that places limitations on transfers.