{"id":4803,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/business-form-and-taxation-pros-and-cons.html"},"modified":"2025-10-26T22:11:00","modified_gmt":"2025-10-27T03:11:00","slug":"business-form-and-taxation-pros-and-cons","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/business-form-and-taxation-pros-and-cons.html","title":{"rendered":"Business Form and Taxation: Pros and Cons"},"content":{"rendered":"\n
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Business Form and Taxation: Pros and Cons<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Key Takeaways<\/h2>\n

In addition to protecting personal assets<\/span>, when creating a legal entity<\/span> for a business, business owners<\/span> should consider the tax implications<\/span> of common <\/span>business structures<\/span>.<\/p>\n\n <\/div>\n <\/div>\n<\/div>\n\n\n

When you\u2019re starting a business, one of the first decisions you\u2019ll have to make is whether to be a sole proprietorship<\/span>, partnership, corporation, limited liability company<\/span> (LLC), or nonprofit organization. The\u00a0type of business<\/span> form you choose<\/a>\u00a0will depend on the nature of your business, its goals, and other factors, including taxation.<\/p>\n

While taxes should not be your only consideration when choosing a business legal structure, it\u2019s a good idea to compare the\u00a0tax obligations<\/a>\u00a0and regulations of each. The taxation pros and cons of each type of business<\/span> form are listed in the following chart.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

Understanding Business Forms and Federal Tax Law<\/h2>\n

Understanding how federal tax applies to different business forms is essential for small business owners, entrepreneurs, and taxpayers. This guide breaks down the concepts, helping you navigate the complexities of business taxes.<\/p>\n\n\n\n\n\n\n\n\n
Business Form<\/th>\n\n

Pros<\/b><\/p>\n<\/td>\n

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Cons<\/b><\/p>\n<\/td>\n<\/tr>\n

Sole Proprietorship<\/a><\/th>\n\n
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  • Easy to set up<\/li>\n
  • No double taxation<\/li>\n
  • Income reported on personal income tax return<\/li>\n
  • Taxes are paid on the income of the business and not on the business as an entity<\/li>\n<\/ul>\n<\/td>\n
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  • \n

    Unlimited <\/span>personal liability<\/span><\/span> for business debts<\/span> and obligations<\/p>\n<\/li>\n

  • \n

    You pay twice the amount of Social Security<\/span>\/Medicare<\/span> taxes as you would as an employee<\/p>\n<\/li>\n

  • \n

    No life insurance deduction; partial health insurance deduction<\/p>\n<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n

Partnership<\/a><\/th>\n\n
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  • No double taxation<\/li>\n
  • All income is taxed proportionately to each of the partners, who report it on their personal tax returns<\/li>\n<\/ul>\n<\/td>\n
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S Corporation<\/a><\/th>\n\n
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  • S Corporation may elect to be treated as a partnership for federal tax purposes, with shareholders reporting their share of the corporation’s separately listed items of income, deductions, loss, and credit on their personal tax returns<\/li>\n
  • Shareholders have personal limited liability<\/li>\n<\/ul>\n<\/td>\n
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  • S Corporation<\/span> may not have more than 100 shareholders<\/li>\n<\/ul>\n<\/td>\n<\/tr>\n
C\u00a0Corporation<\/a><\/th>\n\n
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  • Shareholders have limited personal liability<\/li>\n
  • Health insurance premiums and group life insurance up to $50,000 in benefits are fully deductible by the corporation and not taxable to the employees<\/li>\n
  • The corporate tax rate doesn’t go as high as the individual rate (what a sole proprietor or partner would pay on an individual tax return)<\/li>\n<\/ul>\n<\/td>\n
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Limited Liability Company (LLC)<\/a><\/th>\n\n
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  • Personal limited liability of members<\/li>\n
  • No double taxation<\/li>\n
  • No limit on the number of members<\/li>\n
  • Under IRS “check-the-box” rules, a limited liability company may choose whether to be taxed like a partnership or a corporation<\/li>\n<\/ul>\n<\/td>\n
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