|
Type of business / Ownership |
Best for |
Tax Implications |
Legal Status |
|
Sole proprietorship/
Individual |
Lone-wolf types averse to paperwork and not planning to sell the
business |
File a
From 1040, Schedule C; profits taxed at individual rates |
Personally responsible for debts; owner can be sued for business
mishaps |
|
Partnership /
Two or more people |
Small businesses planning on
expanding by adding employees who can later become
partners |
File a Form 1065; share of profits
taxed at individual rate |
Partners are personally
responsible for debts, even those incurred by a single partner |
|
Limited-liability company (LLC)/
One or more people |
Small
businesses with some legal risk, such as contractors or bed and
breakfast owners |
Similar to a partnership, but with the option to switch to
corporate tax treatment |
Partners' liability is limited to their initial investment |
|
S corporation
/
Up to 75 shareholders |
Tax-sensitive small-business
owners who want the legal protection of a corporation |
Profits taxed at individual rate,
which is often lower than corporate rates |
Shareholders generally aren't
liable for corporation's debt |
|
C
corporation /
Unlimited number of shareholders |
Business planning on hiring several employees, retaining profits
for future expansion, and seeking outside investment
|
Profits taxed at higher corporate rate, but losses can be
carried forward to reduce future taxes |
Shareholders generally aren't liable for corporation's debt |
