Limited Liability for owners?

Yes. Generally limited to assets in corporation.

Yes. Generally limited to assets in corporation.

Yes.

No for general partners; yes for limited partners. Limited partners can’t be actively involved in the business without losing limited liability.

Flexible ownership and capital structure?

Yes

No. Limited to 100 shareholders and one class of stock. Types of shareholders limited.

Yes. LLCs with a single member are disregarded for federal taxes. LLCs must have two or more members to be taxed as partnerships.

Yes. Need at least two partners.

Continuity of life for entity?

Yes.

Yes, but stock ownership must be monitored.

Usually. Depends on state law provisions. Terminates for federal taxes if 50% or more of capital and profits interests are ransferred during a 12-month period.

Generally, no. Depends on state law provisions. Terminates for federal taxes if 50% or more ofcapital and profits interests are transferred during a 12-month period.

Centralized management of entity?

Yes. Managed by board of directors; corporate officers.

Yes. Managed by board of directors; corporate officers.

Often, yes. Managed by elected or appointed managers.

No for general partnership; usually yes for limited partnership. Limited partners often cannot participate in management.

Free transferability of ownership interests?

Yes, but may be contractually limited by a buy/sell agreement.

Yes, but must observe limitations on who can own stock. Also may be contractually limited by a buy/sell agreement.

Generally, subject to members’ approval. May be limited by buy/sell provisions in partnership agreement or separate agreement.

Generally, subject to partners’ approval. May be limited by buy/sell provisions in partnership agreement or separate agreement.

Degree of administrative complexity?

High. Separate tax return required. Must comply with state requirements.

High. Separate tax return required. Must comply with state requirements.

Moderate. Separate tax return required only if multiple owners exist. Meetings may be required.

Moderate. Separate tax return required.

Ability to retain income at lower current tax cost?

Yes.

No.

No.

No.

Taxation of liquidation?

At corporate level, treated as sale of property; distribution to shareholder is taxed as liquidating distribution (capital gain or loss). However, see IRC Sec. 1202 on qualified small business corps.

At corporate level, treated as sale of property; gain passes through and increases shareholder basis; could trigger built-in gains tax if former C corporation.

Generally, nontaxable; each distribution in excess of basis will trigger gain; disproportionate distribution of Section 751 assets may trigger gain.

Generally, nontaxable; each distribution in excess of basis will trigger gain; disproportionate distribution of Section 751 assets may trigger gain.

Tax treatment of fringe benefits for owners?

Good.

Poor, if own more than 2% of stock.

Poor.

Poor.

SE tax on owner  distributions?

No.

No. But, reasonable compensation must be paid to shareholder/employees. If not, distributions may be reclassified as wages.

Generally, yes, unless member is treated as a limited partner. Members treated as general partners treat their share of LLC ordinary trade or business income as SE income. Guaranteed payments for services or the use of capital are also SE income. Members treated as limited partners include only guaranteed payments for services as SE income.

Generally, yes, unless partner is a limited partner. General partners treat their share of partnership ordinary trade or business income as SE income. Guaranteed payments for services or the use of capital are also SE income. Limited partners include only guaranteed payments for services as SE income.

Flexibility to select tax year?

Yes. May select any tax year if not a personal service corporation.

Limited. Generally must use calendar year or make Section 444 election.

Limited. Generally must use tax year of majority interest owners or make Section 444 election.

Limited. Generally must use tax year of majority interest owners or make Section 444 election.

Passive activity loss rules apply?

No, unless a closely held corporation.

Yes—at shareholder level.

Yes—at member level; members may be able to avoid limited partner treatment under proposed regulations.

Yes—at partner level. Treatment of limited partners is unfavorable.

Deduction for corporate dividends received?

Yes

No

No

No

Favorable tax rate on long-term capital gains?

No, regular corporate rates apply.

Yes

Yes

Yes

Personal holding company tax applies?

Yes

No

No

No

Accumulated earnings tax applies?

Yes

No

No

No

Unreasonable owner

compensation issue applies?

Yes. For unreasonably high compensation.

Yes, for unreasonably low compensation.

No

No

Personal service corporation rules apply?

Yes

No

No

No

Limitations on use of cash method?

Yes, but smaller corporations and PSCs can use cash method.

No, unless the corporation maintains inventories or is a tax shelter. (However, if a gross receipts test is met, the cash method may be used even if inventories are maintained.)

No, unless the LLC has a C-corporation member, maintains inventories, or is a tax shelter. (However, if a gross receipts test is met, the cash method may be used even if inventories are maintained.)

No, unless the partnership has a C corporation partner, maintains inventories, or is a tax shelter. (However, if a gross receipts test is met, the cash method may be used even if inventories are maintained.)

Limitations on use of NOLs and other tax attributes after ownership change?

Yes

N/A. Losses pass through to owners. Limits apply at shareholder level.

N/A. Losses pass through to owners. Limits apply at member level.

N/A. Losses pass through to owners. Limits apply at partner level.

Entity-level AMT?

Yes, but smaller corporations are excepted.

No, but AMT information must be provided to shareholders.

No, but AMT information must be provided to members.

No, but AMT information must be provided to partners.

Potential ability to reduce payroll taxes of owneremployees?

No

Yes, within limits of reasonableness.

No, but may benefit from employing owner’s children under age 18.

No, but may benefit from employing owner’s children under age 18.

Potential favorable treatment of owner-level interest expense on debt to inject capital or acquire ownership interest?

No

Yes

Yes

Yes

Double taxation at state and local tax level?

Generally yes

Sometimes

Rarely

Rarely

Additional owner level tax basis from entity-level debt (for loss deduction purposes)?

No

Yes, but only for bona fide debt running directly to the shareholder.

Yes, but must remain aware of at-risk limitations.

Yes, but must remain aware of at-risk limitations.

Basis adjustments available upon purchase of ownership interest?

No

No

Yes. Mandatory basis adjustments may be required on certain transfers or distributions.

Yes. Mandatory basis adjustments may be required on certain transfers or distributions.

Flexibility to make tax-free contributions?

Yes, if Section 351 requirements are met.

Yes, if Section 351 requirements are met.

Generally, yes. However, certain contributions may trigger gain.

Generally, yes. However, certain contributions may trigger gain.

Flexibility to make tax-free distributions?

No. Distributions are generally taxable dividends. Distribution of appreciated property results in corporate gain.

Yes. Nontaxable to shareholder to extent of basis; distribution of property results in deemed sale at FMV, which may trigger gain.

Yes. Nontaxable to extent of basis in LLC; disproportionate distribution of Sec. 751 assets may trigger gain.

Yes. Nontaxable to extent of basis in partnership; disproportionate distribution of Sec. 751 assets may trigger gain.

Ability to make special tax allocations among owners?

No

No

Yes, but must have substantial economic effect.

Yes, but must have substantial economic effect.

Ability to shift entity income among family member owners?

No

Yes, by manipulating wages of employee-owners.

Yes, within limits of IRC Sec. 704 (e) rules.

Yes, within limits. of IRC Sec. 704  (e) rules.

Possibility of corporate-level built-in gains tax, excess net passive income tax, and LIFO recapture tax if former C corporation?

No

Yes

No

No

Potential loss of favorable passthrough tax rules if ownership and capital structure rules violated?

No

Yes

No

No

Treatment of gain on sale of ownership interest?

Capital. Gain may be excludable if qualified small business stock.

Capital.

Capital, unless partnership holds Section 751 hot assets.

Capital, unless partnership holds Section 751 hot assets.

Valuation discounts available for estate tax valuation?

Yes

Yes

Probably, yes. However may be limited if LLC terminates on death of member.

May be limited. IRS may argue for liquidation value.

Ability to use tax credits?

Offsets corporate tax.

Passed through to shareholders to be applied against their taxes.

Passed through to members to be applied against their taxes.

Passed through to partners to be applied against their taxes.

Qualified retirement plans for employee/owner?

Payments are deductible if plan is nondiscriminatory.

Payments are deductible if plan is nondiscriminatory.

Payments to a Keogh, SEP, or SIMPLE are deductible. Payments to employee qualified plans are deductible if plan is nondiscriminatory.

Payments to a Keogh, SEP, or SIMPLE are deductible. Payments to employee qualified plans are deductible if plan is nondiscriminatory.

Life insurance premiums for employee-owner deductible?

Yes. Premiums for first $50,000 group-term life are deductible and not taxable to employee.

Yes. Deductible by corporation as compensation.

No

No

Health insurance premiums for employee-owner deductible?

Yes

Yes. Deductible by corporation as compensation; 100% deductible by more-than-2% shareholder.

Yes. Typically deductible by LLC as guaranteed payment; reported as income by members; 100% deductible by members.

Yes. Typically deductible by partnership as guaranteed payment; reported as income bypartners; 100% deductible by partners.

Income taxed to owners?

No. Tax paid by corporation. Flat rate is 21%.

Yes. Maximum rate is 37%. Effective rate may be discounted by 20% if QBID applies. Additional rate of 3.8% may apply if passive.

Yes. Maximum rate is 37%. Effective rate may be discounted by 20% if QBID applies. Additional rate of 3.8% may apply if passive.

Yes. Maximum rate is 37%. Effective rate may be discounted by 20% if QBID applies. Additional rate of 3.8% may apply if passive.

Deductibility of losses subject to basis limitation?

No. Losses d eductible by corporation. May create NOL.

Yes. Losses generally deductible by shareholder; liabilities do not increase basis for deducting losses except for direct loans from shareholder.

Yes. Losses generally deductible by member to extent of basis; liabilities may increase basis for deducting losses.

Yes. Losses generally deductible by partner to extent of basis; liabilities may increase basis for deducting losses.