What’s the Best Entity Structure for a Small Business?

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.

A

                                 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.

A

                            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 nsupowit@claruspartners.com or call 614-545-9100.

 

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