Sole Proprietorship – Is a one person owned entity. Everything is owned in the owner’s personal name. Income is reported on Schedule C of his or her Form 1040 personal return. A huge problem with a sole proprietorship however, is the personal liability issue. The sole proprietor has unlimited liability for all acts of the business.
C Corporation – Has two levels of federal income tax. If income is distributed to shareholders, it is first taxed at the corporate level. It is then taxed on the personal return of the shareholder who receives the distribution (double taxation). This type of entity is common where income is primarily maintained within the company, and income is not usually distributed to shareholders. This type of entity has limited liability.
S Corporation – Income is passed through the corporation to the shareholder. The income is only taxed at the shareholder level (that is why it is often referred to as a “pass through entity”). Income tax rates are based on the shareholders personal tax bracket, instead of at a corporate level. This can be beneficial if the shareholder is in a low tax bracket. This type of entity has limited liability.
Limited Liability Company (LLC) - Income can be passed through the corporation to the shareholder. The income is only taxed at the shareholder level (that is why is often referred to as a “pass through entity”). Income tax rates are at the shareholders personal tax bracket, instead of at a corporate level. This can be beneficial if the shareholder is in a low tax bracket. LLCs can be taxed like a partnership, instead of a corporation. This type of entity has limited liability.
