In my last blog, I discussed the different entity structures for a small business. In this blog, I compare and contrast the Partnership versus the S Corporation. It is important to evaluate the different options with a full understanding of the advantages and disadvantages.
Partnerships S Corporations
Flexibility K-1 amounts can be allocated K-1 amounts must be allocated
among the partners using any among the partners based on
reasonable method. ownership percentage.
Cash and property distributions Cash and property distributions
can vary among partners. must agree to ownership percentage.
Losses Partnership liabilities create Losses can only be deducted to the
partner basis for deducting losses. extent of stock basis and direct
shareholder loans to the company.
Employment Owners are taxed on net profits. Owners can earn salaries or wages
Taxes Guaranteed payments may be which are deducted in calculating
used to reward specific partners. net profits.
Active trade or business earnings Employment taxes are limited to
are subject to self-employment wage earnings. Net profits are not
tax at the partner level. subject to self-employment tax.
Applications Popular for real estate companies Popular for active businesses
**They usually have significant **They often have large trade or
liabilities – See Losses. business profits – See Emp Taxes.
Clarus Partners understands small business. If you need help choosing or changing entity form to achieve your goals please contact Nancy Supowit, CPA at firstname.lastname@example.org or call 614-545-9100.