Business Form and Taxation: Pros and Cons

Pros

Cons

-Easy to set up

-No double taxation

-Income reported on personal income tax return

-Taxes paid on income of the business and not on business as an entity.

-No personal limited liability protection

-You pay twice the amount of Social Security/Medicare taxes as you would as an employee

-No life insurance deduction; partial health insurance deduction

-No double taxation

-All income is taxed proportionately to each of the partners who report it on their personal tax returns

-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

-Shareholders have personal limited liability

-S Corporation may not have more than seventy-five shareholders

-Shareholders and those owning 5 percent or more in stock have limited employee benefits

-Shareholders have limited personal liability

-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

-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)

-Double taxation-the corporation pays taxes on its income and the shareholder pays taxes on dividends

-Shareholders cannot deduct the losses of the corporation

-Personal limited liability of members

-No double taxation

-May have more than seventy-five members

-Under IRS "check-the-box" rules a limited liability company may choose whether to be taxed like a partnership or a corporation

-Active members are subject to self-employment tax for Social Security and Medicare

-Limited liability companies are a relatively new business form and the laws are still evolving