2012 Comparison of Business Entities

NOTE: THESE COMPARISONS DO NOT CONSIDER STATE IMPLICATIONS.

Partnership/Limited Liability
Applicable Factor C Corporation S Corporation Sole Proprietor Partnership Limited Liability Company

I. Formation

A. Method Articles of Incorporation Articles of Incorporation None Partnership agreement Articles of Organization filed
in state recognizing LLCs

B. Owner eligibility

1. Number of No limit 100 (Note family members One Two or more for general No limit
Owners considered as one) partnership; one or more
general and one or more
limited for limited partnership

2. Type of Owners No limitation Certain individuals, estates, Individual No limitation No limitation

3. Affiliate Limits No limitation Can own up to 100% of the No limitation No limitation No limitation
stock of a C corporation and
own 100% of the stock of a
qualified sub-s subsidiary. No
limitation

C. Capital Structure

1. Equity No limitations (multiple Only one class of stock (can N/A No limitations (multiple No limitations (multiple
classes) have voting rights differences) classes) classes)

2. Debt No specific limits on Safe-harbor for debt No specific limits No specific limits No specific limits
debts/equity ratio

D. Status Determination

1. Election by Entity No election requirements Required election No election requirements No election requirement but None, unless corporate status
state law filing is elected

2. Owner Consents None required Consent required None required None required None required

E. Liability Limited to shareholder’s Limited to shareholder’s Unlimited General partners jointly and Generally limited to
(check applicable capital contributions contribution severally liable. Limited member’s capital
state laws) partners are generally limited contributions.
to capital contributions.

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 Partnership/Limited Liability
Applicable Factor C Corporation S Corporation Sole Proprietor Partnership Limited Liability Company

II. Operational Phase

A. Tax Year Any year permitted (limit for Generally calendar year Generally calendar year Generally calendar year Generally calendar year
personal service corporation)

B. Tax on Income Corporate level Owner level except QSST, Individual level Owner level Member or entity if elected
where paid by beneficiary.

C. Elections Corporate level Corporate level Individual level Partnership level Entity level

D. Allocation of Income/ Not permitted (except through Not permitted (except through N/A Permitted if substantial Permitted if substantial
Deductions multiple equity structure) debt/equity structure) economic effect economic effect

E. Character of Income/ No flow-through to Flow-through to shareholders Flow-through to individual Flow-through to partners Flow-through to members
Deductions shareholders

F. Net Operating Losses No flow-through to Flow-through to shareholders Flow-through to individual Flow-through to partners Flow-through to members
shareholders (limited to basis) (limited to basis) (limited to basis)

G. Net Capital Losses No flow-through, but five Flow-through to shareholders Flow-through to individual Flow-through to partners Flow-through to members
year carryforward

H. Effect of Statutory Imposed at corporate level Imposed at shareholder level Imposed at individual level Imposed at partner level Imposed at member level
Limitations

III. Owner Compensation

A. Fringe Benefits Shareholder-officers qualify Shareholder officers qualify Generally subject to limits Limited participation for Limited participation for
for benefits for benefits (medical applicable to individuals partners members
premiums for greater than 2%
shareholders treated like
partnership guaranteed
payments)

B. Retirement Benefits Shareholder-officers included Certain limits on shareholder- Generally subject to limits Certain limits applicable to Certain limits applicable to
in qualified plans officers applicable to individuals partners members

C. Reasonable Applicable to shareholder- Applicable to shareholder- N/A Applicable where capital is a Applicable where capital is a
Compensation Limits officers officers material factor material factor

D. Payroll Taxes Shareholder-officers subject Shareholder-officers subject Active owner subject to SE Active general partner subject Active member subject to SE
to payroll taxes only on to payroll taxes only on taxes on all income. No to SE taxes on all income. No taxes on all income. No
compensation compensation SUTA or FUTA. SUTA or FUTA. SUTA for FUTA.

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 Partnership/Limited Liability
Applicable Factor C Corporation S Corporation Sole Proprietor Partnership Limited Liability Company

IV. Transactions with Owners

A. Distributions of Cash Dividends to extent of Dividnds, generally no effect No effect No effect except in calculation No effect except in
earnings and profits until the accumulated of basis calculation of basis
adjustment account (AAA)
fully recovered (beware
transition rules for former C
corps)

B. Distribution of Dividend treatment; gain Gain recognition to entity No effect No gain or loss to entity No gain or loss to entity
Property recognition to entity

C. Purchase of Owner’s
Interest

1. Partial Interest Probable dividend treatment Tax-free, but gain for Treated as sale of each asset Capital gain treatment, except Capital gain treatment, except
proceeds in excess of basis ordinary income for ordinary ordinary income for ordinary
income assets. income assets.

2. Entire Interest Capital gain treatment with Capital gain treatment after Cannot sell entity interest; Capital gain treatment, except Capital gain treatment, except
exceptions basis recovered sale of business is viewed as a ordinary income for ordinary ordinary income for ordinary
sale of each asset income assets and certain income assets and certain
§736 payments §736 payments

D. Property Sales to Possible dividend treatment or Any excess value treated as N/A Any excess value treated as Any excess value treated as
Entity by Owner contributions to capital distribution or contribution distribution or contribution distribution or contribution

E. Property Sales to Possible dividend treatment or Any excess value treated as N/A Any excess value treated as Any excess value treated as
Owner by Entity contributions to capital distribution or contribution distribution or contribution distribution or contribution

V. Termination of Entity or
Owner Interest

A. Sale of Interest by Capital gain; no effect on Capital gain; no effect on Cannot sell entity interest; Capital gain subject to § 751 Capital gain subject to § 751
Owner to Third basis of corporation’s assets basis of corporation’s assets sale of business is viewed as a ordinary income ordinary income
Person (note exception § 338) (note exception § 338) sale of each asset categorization categorization

B. Death of Owner Estate continues as Estate continues as Estate takes over business Estate as partner subject to Estate as member subject to
shareholder; For basis from shareholder; For basis from agreement, For basis from agreement, For basis from
decedent see Code Section decedent see Code Section decedent see Code Section decedent see Code Section
6018; no effect on basis of 6018; no effect on basis of 6018 6018
corporation’s assets corporation’s assets

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 Partnership/Limited Liability
Applicable Factor C Corporation S Corporation Sole Proprietor Partnership Limited Liability Company

C. Liquidation
Distributions

1. Effect to Gain recognition if Gain recognition if N/A No gain recognition on asset No gain recognition on asset
Distributor appreciated property appreciated property distributions distributions
distributed distributed

2. Effect to Recipient Capital gain on excess value Capital gain on excess value N/A Substituted basis in noncash Substituted basis in noncash
received over basis received over basis assets equal to basis in assets equal to basis in LLC
partnership interest interest

D. Reorganization Tax-free to shareholders if Tax-free to shareholders if N/A No taxability on merger of No taxability on merger of
qualifying under qualifying under partnerships LLC
reorganization provisions reorganization provisions
(§ 354 and § 368) (§ 354 and § 368)

E. Carryover of Tax Carryover of tax attributes to Carryover of tax attributes to N/A N/A N/A
Attributes successor entity if tax-free successor entity if tax-free
reorganization reorganization

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