Comparison of Different Entities

There are several entities to choose from when starting a business or converting from a sole proprietorship or general partnership. Usually the main reason for forming an entity is for liability protection of the owners. Yet there are many other business and tax issues to resolve. This article only addresses some of the most common issues.

1) "C" Corporations. The "C" Corporation is taxed at progressive rates that rapidly increase. A "C" Corporation must pay tax on any profit it earns if it pays dividends to its shareholders or distributes /liquidates its assets, and the shareholders pay income tax resulting in a "double" tax between the two. There are certain benefits to operating as a "C" Corporation, such as being able to perform tax free exchanges, adopt a medical reimbursement plan (over and above an insured plan) and no limits on the type and number of shareholders.

2) "S" Corporations. "S" Corporations are taxed similar to LLC's and Partnerships and in addition to the $800 minimum tax they pay 1.5% on net income, but no gross revenue tax.

There are several key characteristics of "S" Corporations, one of which it avoids a double tax resulting from a sale of assets and distribution of the proceeds to the shareholders. Also, there are several requirements to be an "S" Corporation and specific restrictions to maintain that status, such as prohibition of two classes of stock, limitation on the number and type of shareholders (e.g. no non-resident aliens).

3) Gross Revenue Tax. An LLC and Partnership (Limited or General) are taxed exactly the same as "partnerships" but LLC's are also subject to a gross revenue tax (not a net profit but a tax based on gross revenue). This progressive tax is as follows:

Gross Revenue Tax

(Equal to or over) (Not over) (The fee is)

$ 250,000 $ 499,999 $ 900

$ 500,000 $ 999,999 $ 2,500

$1,000,000 $4,999,999 $ 6,000

$5,000,000 and over $11,790

4) Profit & Loss. This is a tax concept and does not necessarily relate to cash. Assume that a start up "S" Corporation borrows $50,000 to buy equipment which is depreciated over five (5) years so that the corporation obtains a $10,000 tax deduction in its first year. In the same year it generates $100,000 in cash and assuming no other expenses, at the end of the year it pays off the $50,000 loan and distributes $50,000 to the shareholders. The result is that the corporation will pass through to the shareholder $90,000 of taxable profit but there will only be $50,000 of cash distributed.