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 is 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.
There are many advantages for each type of business. Sole Props are the easiest to set up since
the paperwork is minimal. A partnership is a a business set up by two or more people. A LLC
(limited Liability Corporation) is a flexible business that combines the aspects of both
partnerships and corporations. Corporations are created by shareholders. They have many more
tax advantages then the other types.
Sole Props allow the owner to have complete control. However, it also provides the least
protection from personal assets. Partnerships have pass through entity which means that the
income is treated as the owners’ incomes so it is only taxed once. Owners in partnerships are
responsible for the liabilities of the firm. (Team, 2022) there are different aspects of partnerships:
General, Limited Partnership, and LLPs. LLCs are the best of both worlds. LLCs protect the
owners from any personal liabilities. The Corporations can be classified as C Corp and S Corp. C
Corps are double taxed: once at the entity level and then again individually. S Corp are a pass
through so they are only taxed once.
As far as disadvantages and advantages of sole proprietorship, corporations, and partnerships are
Sole Proprietorships - The advantages of sole proprietorships are the owners have an elevated
level of autonomy to run their business. Next, there are truly little Federal, State, and Local
regulations for sole proprietorships. Also, sole proprietorships do not have to pay the corporate
tax rate and deal with double taxation. Some disadvantages are the lack of liability for the owner.
Meaning they are responsible for personal and business debt obligations comprehensively. In
other words, they are personally responsible for all business debts. Partnerships- In a partnership
one big advantage is the share of responsibility of the partners to manage and run the business.
Also, Partners report their share of profits and losses on their personal income tax returns. They
also do not have to file a business tax return. Disadvantages are the liabilities are comprehensive
for partners being serious and personal debt.
Corporations- Some advantages to name are the limited liability protection for shareholders,
directors, and officers for company obligations. That said, a shareholder's debt liability does not
exceed his investment. Corporations can also raise capital by issuing stocks and bonds but not
paying the corporations' existing obligations before issuing. On disadvantages of course the big
one, double taxation. Meaning, Corporation must file a business tax return with the IRS and pay
taxes on the profits and losses at the corporation's applicable corporate tax rate. Shareholders are
responsible for their portion of dividends on their individual income taxes.
Example: There are 3 individuals forming a property company with rental income and interest
income on mortgages on properties they finance. In this case a partnership is ideal for the 3
individuals considering they would have less liability as it is divided up among all 3 partners.
Also, the managing responsibilities are issued out and provide each with more flexibility and
opportunities for their business. They also would not be required to file a business tax return and
each partner would be individually responsible for his or her share of the losses and profits. Being
able to avoid double taxation and corporate tax rates.
Team, C. (2022, Nov 26). Types of Businesses. Retrieved from Corporate Financial Institute:
https://corporatefinanceinstitute.com/resources/management/types-of-businesses/
Rupert, T. J., & Anderson, K. E. (2023). Prentice Hall’s Federal Taxation 2023 Corporations,
Partnerships, Estates & Trusts. Pearson Custom.
