Sole Proprietorship
The advantages of selecting a sole proprietorship include simplicity of tax forms, lower tax
rates than corporate rates, and ability to offset non-passive income of owner with business
loss. Some disadvantages include unlimited liability, higher income brackets are subject to
tax rates higher than corporate rates, and calendar year must be used as the tax year. Owners
may withdraw cash without treating it as a dividend.
Partnerships
The advantages of partnerships are that it is not subject to double taxation. When business
owner receives contributions and distributions, normally they are not taxed. Furthermore, like
sole proprietorship, partner’s income can be offset by pass-through income/losses.
Disadvantages of partnerships is that depending on the marginal rate of income, tax rates can
be higher than that for corporations. Furthermore, partners’ fringe benefits are taxed as they
are not considered as employees.
C-Corporation
Compared to highest income bracket tax rates, corporate tax rates may have lower marginal
rates. Another huge advantage of forming a corporation is that owners are subject to limited
liability. Furthermore, certain fringe benefits are tax-exempt for shareholder-employees.
Some disadvantages include that corporations are subject to double taxation (business-entity
level and individual level). Unlike partnerships, net operating losses does not offset individual
shareholder income. Furthermore 20% QBI (qualified business income) deduction may not be
taken. Finally, when corporations distribute property in form of dividends to shareholders,
these are also taxable.
Example of business entity selection:
For companies in the airline industry or entering it, there is expected to be great risk. So, one
should choose to form a C-corporation that is subject to limited liability. Airline industries
can also be highly profitable, and C-corporations are subject to top corporate marginal rate of
21% which is lower than the highest bracket income tax rate of individuals. Thus, forming a
C-corporation deems appropriate in forming a company in the airlines industry.
References:
Rupert, T. J., & Anderson, K. E. (2023). Prentice Hall’s Federal Taxation 2023
Corporations, Partnerships, Estates & Trusts. Pearson Custom.
