Summary of Significant Considerations in Business Formation
The summary below is not complete and ignores many subtle and important considerations, especially state tax issues, multi-state business authorizations, etc.  The choice of how to form and structure a business is substantially more complicated than this summary.  This summary should be used ONLY as a beginning point from which a detailed consideration of all relevant aspects of the proposed business may be made, in conjunction with competent professional tax and legal advice.  DO NOT rely on this chart alone as a basis for making any business formation decisions.  CONTACT YOUR ATTORNEY AND TAX ADVISOR BEFORE ACTING.
Legal Entity	Tax Election	Tax on Profits	Tax on Losses	Advantages	Disadvantages	Other
Sole Proprietor	none available  taxed as a sole proprietor using Schedule C to form 1040	Net income from business is included as ordinary income on Individual income tax return.  Subject to Self-Employment Tax (social security)	Subject to passive activity and hobby loss limitations, losses are fully deductible against other income on individual income tax return, excess loss can be carried back 2 years and forward 20 years as net operating loss.	Simple to set up, least administrative burden, losses can offset income from other sources	Unlimited liability.	Licensed activity requires owner/proprietor to individually hold the license.  Net capital requirements may be met using individual assets.
Partnership	none available -- taxed as a partnership, Files form 1065, flows to Schedule E page 2, form  1040	Partner's share of net income or loss is taxed in the same manner as the same type of income or loss as a sole proprietor.  Identical passive loss and hobby loss rules apply.		Can be established quickly & cheaply.  Tax advantages when income, losses and/or ownership are to be split unevenly or by formulae	Requires multiple owners.  Unlimited Liability, can subject partner to liability from acts of other partners.  Disagreements may lead to lawsuits between partners.  Net income subject to social security tax.	Certain licensed activities may require all partners to individually hold licenses.  Entity must meet any state or federal net capital requirements using business assets
Corporation	C-Corporation	Net income is taxed at corporation rates to the entity.  Entity pays the tax.  Second level of taxation at the stockholder level when profits are distributed as dividends.	Net losses are deductible only against entity net income.  May  be carried back 2 years and/or forward 20 years until absorbed	General Liability can be limited to the investment in the business.  More liberal rules for fringe benefits than other tax elections.	Losses may be trapped during periods of no profits.  Potential double tax on profits.   Recommended not to own/operate appreciating assets	Perpetual Life -- business continues regardless of who the shareholders are.  Owners & officers are treated as employees if they work in the business, subject to withholding.  Entity may be able to meet some licensing requirements on it's own.  All net capital determinations are made at the entity level.
	S-Corporation	Net income from business is included as ordinary income on Individual income tax return.  Net income is determined AFTER salaries to owners & officers and is NOT subject to social security tax.	Subject to passive activity and hobby loss limitations, losses are fully deductible against other income on individual income tax return, excess loss can be carried back 2 years and forward 20 years as net operating loss.	General Liability can be limited to the investment in the business.  Eliminates the double taxation of corporate profits distributed as dividends, and removes the potential for trapped losses.	Limits on number and legal entity of owners.  Fringe benefits for owners have tax limitations. Risk of unexpected loss of S eligibility
Limited Liability Company.  (Professional Limited Liability Company,  Limited Liability Partnership)	Sole Proprietor	Net income or loss is taxed in the same manner as the same type of income or loss as a sole proprietor.  Identical passive loss and hobby loss limitations apply.  Nonetheless, assets must be distinguished between the LLC and the individual owner.		General Liability can be limited to the investment in the business assets	Additional recordkeeping, annual reporting.  Tax election is restricted to single member LLC's	MAY lose the ability to use personal assets to satisfy net capital requirements.  Check with licensing agency.
	Partnership  (only election allowable for Limited Liability Partnership)	LLC member's share of net income or loss is taxed in the same manner as the same type of income or loss as a sole proprietor.  Identical passive loss and hobby loss rules apply.		General Liability can be limited to the investment in the business assets.  Substantial tax advantages if income, losses or ownership are to be split unevenly or by formulae	Requires multiple owners.  Net income subject to Social Security tax.  Entity level recordkeeping and reporting requirements.	Certain Licensed Activities may require all members to individually hold licenses.  Entity must meet any state or federal net capital requirements using business assets
	C-Corporation	Net income is taxed at corporation rates to the entity.  Entity pays the tax.  Second level of taxation at the Member level when profits are distributed as dividends.	Net losses are deductible only against entity net income.  May  be carried back 2 years and/or forward 20 years until absorbed	General Liability can be limited to the investment in the business.  More liberal rules for fringe benefits than other tax elections.	Losses may be trapped during periods of no profits.  Potential double tax on profits.	Members are treated as employees if they work in the business, subject to withholding.
	S-Corporation	The IRS will accept S-Corporation elections from an LLC that first makes the election to be taxed as a corporation. For the issues discussed here, all factors are the same as discussed under S-Corporation, above.