What type of entity should you use for a business partnership

There are definite advantages and disadvantages to the different entities that exist in business.If you have chosen to participate in a business partnership your options for different business entities become more limited.A business entity is frequently referred to as the legal form of the business.The entity will largely dictate the legal obligations (in the form of liability, responsibility, taxes, etc.) of your new business.

Regardless of the entity that you choose for your business partnership, it is important that you be aware of all the options available to you (including deciding to participate in a sole proprietorship instead of a partnership).If you are still unsure about the course of action to take it is wise to seek legal council as the entity of your business may have serious implications in future dealings.Not only will a licensed attorney be able to provide you with helpful council but a tax professional can also help you with the financial questions that any given business entity will have on your financial future.

Below are lists of both advantages and disadvantages to the most common business entities.It is up to you, your partner and your legal professional aid to determine what would be in the best interest of all who are directly involved (even if that means deciding not to have a business partnership at all).

Advantages of each business entity:

Sole proprietor: Sole proprietorships are relatively easy to set establish, easy to run, the easiest for first-time entrepreneurs to understand, and the easiest to get out of.
Partnership: A good way to participate in a venture with other individuals without having to deal with payroll issues is through a partnership.Partners can also get "unequal" distributions of income if all parties agree.So you have some flexibility because not everything has to be split 50/50.
S Corporation: Tax benefits to an S Corporation include no Social Security or Medicare taxes on profits or dividends from the corporation to shareholders.
C Corporation: 100% deductible health insurance for employees (including shareholders), potentially fully deductible medical reimbursement and fringe benefits plans for all employees (including shareholders), profits of up to $50,000 annually are taxed at 15% if retained in the corporation rather than at your, potentially higher, personal income tax rate.
LLC: Owners get the limited liability features of a corporation combined with the income-splitting flexibility of a partnership; one-person LLCs can report income on a Form Schedule C with personal tax returns.

Disadvantages of each business entity:

Sole proprietor: Unlimited personal liability, 15.3% self-employment tax on all earnings up to $80,400.There is no distinguishing between a sole proprietor's business and personal assets.
Partnership: In a Partnership each individual is personally responsible for the financial actions of each of the other partners.Ordinary income from the partnership is subject to self-employment tax and tracking of partners' capital accounts balances can be complicated.
S Corporation: You can't fully deduct your own health insurance or benefits plan costs (only those of employees).If you are a home based S Corporation you also lose most of the benefits of the home office deduction even if that's the only place where you operate your business.
C Corporation: If the corporation loses money, you don't get to deduct it on your personal tax returns.If profits that have been already taxed at the corporate level are later distributed to you as dividends, you'll have pay tax on that money again.
LLC: Owners get stuck with the same self-employment tax treatment as partners and sole proprietors although states may differ in their tax treatment of LLCs.