| Effective Tax Rates | Taxed at rates ranging from 15% to 35% | Income flows through to the shareholders and is taxed at their individual rates ranging from 10% to 38.6%. | Income flows through to the partners and is taxed at their individual rates ranging from 10% to 38.6%. | Income flows through to the members or partners and is taxed at their individual rates ranging from 10% to 38.6%. | The sole proprietor is taxed at his or her individual rates ranging from 10% to 38.6%. |
| Tax on Sale or Liquidation | Rules require a double tax on profits realized through sale or liquidation of assets. | Generally, sale of assets will only create one tax which will flow to the shareholders. | Generally, sale of assets will only create one tax which will flow to the partners. | Generally, sale of assets will only create one tax which will flow to the members and partners. | Gain or loss will recognized by individual. |
| Taxability of Distributions | Distribution will generally be treated as dividends, and taxpayers will pay additional tax. | Profits of in the company can be distributed at no additional tax to shareholders. | Generally, distributions can be taken without gain or loss recognition. | Generally, distributions can be taken without gain or loss recognition. | Distributions can be taken without any tax consequences. |
| Corporate Penalty Taxes | Subject to personal holding company tax, accumulated earnings tax and alternative minimum tax. There is also potential for additional tax because of disallowance of excess compensation. | Generally none. However, a former C corporation which has elected S status has a potential to pay a "built-in-gains" tax on disposition of assets occurring within 10 years after election. | N/A | N/A | N/A |
| Deductibility of Losses | Losses cannot be utilized by shareholders. | To the extent of their basis, shareholders can deduct their pro rata share of the corporate losses. | To the extent of their basis, partners can deduct their pro rata share of partnership losses. Subject to passive loss rules. | To the extent of their basis, members or partners can deduct their pro rata share of entity losses. Subject to passive loss rules. | To the extent of his/her basis, an individual can deduct his/her losses, subject to passive loss rules. |
| Accounting Methods | Generally, corporations with revenues in excess of $5 million, including related entities, must use the accrual method of accounting. | All S corporations can elect cash basis method of accounting, provided that method is acceptable under general tax law. | Cash or accrual. | Cash or accrual. | Cash or accrual. |
| Classes of Stock | C corporations may have different classes of stock, including preferred. | S corporations may only have one class of stock, common. | N/A | N/A | N/A |
| Eligible Shareholders | There is no restriction on who may own stock, including ESOPs, corporations, etc. | Except for certain trusts, new estates, and ESOPs, only U.S. citizens or residents may own stock. | N/A | N/A | N/A |
| Subsidiaries | No limitations. | No limitations. | N/A | N/A | N/A |
| Disallowances of Expenses | Disallowances may be taxed both to the corporation and the shareholders. | Disallowances of expenses, such as travel and entertainment, are taxed only to the shareholders. | Disallowances of expenses, such as travel and entertainment, are taxed only to the partners. | Disallowances of expenses, such as travel and entertainment, are taxed only to the members and partners. | Disallowances of expenses, such as travel and entertainment, are taxed to the individual. |
| Payroll Taxes | Generally, payments to working shareholders must be treated as compensation, thereby being subject to all payroll taxes. | Income from S corporations is not subject to self-employment tax and may not be subject to payroll taxes of any kind, assuming reasonable compensation is paid to active shareholders. | Active income to partners is subject to self-employment tax. | Active income to members and partners are subject to self-employment tax. | Active income from the proprietorship is subject to self-employment tax. |
| Carry Forwards & Carry Backs | Losses may be carried forward for 20 years and carried back for 5 years. | No carry forwards or carry backs available at corporate level. | No carry forwards or carry backs available at partnership level. | No carry forwards or carry backs available at entity level. | May be carried forward or back at the by the individual. |
| Passive Income | No restrictions on type of income, although an excessive amount of passive income could trigger personal holding company tax. | Newly electing S corporations with prior earnings and profits cannot have more than 25% passive income (rents, interest, dividends, etc.). | If a partner is passive than income is subject to passive loss rules. | If a partner or shareholder is passive than income is subject to passive loss rules. | If an indivdual is passive than income is subject to passive loss rules. |
| Fringe Benefits | Generally, fringe benefits paid on behalf of shareholders/ employees can be deducted. | Generally, health and disability insurance premiums paid on behalf of shareholders cannot be fully deducted, except if amount is included on W-2. | Generally, health and disability insurance premiums paid on behalf of partner can be deducted at 60%. | Generally, health and disability insurance premiums paid on behalf of member or partner can be deducted at 60%. | Generally, health and disability insurance premiums paid on behalf of the individual can be deducted at 60%. |
| Tax Shelter Investments | With the exception of personal service corporations, passive loss rules generally do not apply to regular corporations. | Tax shelter type investments will be treated as if they were owned personally, with shareholders subject to passive loss limitations. | Tax shelter type investments will be treated as if they were owned personally, with partners subject to passive loss limitations. | Tax shelter type investments will be treated as if they were owned personally, with members and partners subject to passive loss limitations. | Tax shelter type investments will be treated as if they were owned personally, with individual subject to passive loss limitations. |
| Fiscal Year | May adopt fiscal years other than December 31st. | Generally, S corporations must adopt a tax year in September or later, thereby limiting tax planning opportunities. | Generally, partnerships must adopt a calendar tax year. | Generally, LLCs and LLPs must adopt a calendar tax year. | Generally, individuals must adopt a calendar tax year. |
| Qualified Plan | Loans to shareholders are subject to the same rules that apply to non-shareholders. | Loans to a 5% or more shareholder are prohibited transactions and will probably disqualify the plan. | Loans to partners are subject to the same rules that apply to non-partners. | Loans to members or partners are subject to the same rules that apply to non-members or non-partners. | Loans to individuals treated as withdrawals. |
| LIFO Reserve | N/A | A newly electing corporation must treat existing LIFO reserves as taxable income for the year prior to when the election becomes effective. | N/A | N/A | N/A |
| Salaries to Shareholders | Accrual basis corporations may pay these expenses within 2-1/2 months after year-end to shareholders not owning more than 50%. | Salaries and other expenses to shareholders must be determined and paid prior to the last day of the corporate year in order to be deductible. | Salaries and other expenses to partners must be determined and paid prior to the last day of the year in order to be deductible. | Salaries and other expenses to members and partner must be determined and paid prior to the last day of the year in order to be deductible. | N/A |
| Change in Status | A C corporation cannot elect S status if it had been an S corporation at any time within the previous 5 years. | An S corporation can terminate at any time. | An partnership can terminate at any time. | An LLC or LLP can terminate at any time. | A sole proprietorship can terminate at any time. |
| Capital Gains Exclusion | Newly acquired stock in most C corporations can qualify for 50% reduction in capital gains tax if held more than 5 years. | S corporation stock has no special treatment on disposition. | N/A | N/A | N/A, except for certain qualified business stock. |
