Summary of Tax Issues with Commonly Used Small Business Entity Types Characteristics Single Member - Limited Liability Company S Corporation Multi Member LLC LLC taxed as subchapter S Corporation Limited Partnerships Federal Tax Treatment The Entity itself is not taxed, a federal and state Schedule C reports  profits and losses to the single member The Entity itself is not taxed, profits and losses pass through to the shareholders - main advantage The Entity itself is not taxed and profits and losses pass through to the members as in a partnership. The Entity itself is not taxed, profits and losses pass through to the shareholders.  Form 1120S is filed with the IRS The Entity itself is not taxed, profits and losses pass through to the partners.  Form 1065 is filed with the IRS. State Tax Treatment Legal treatment is different from state to state.  In Pennsylvania, LLCs are subject to Capital Stock Tax, and file the RCT-101 With the S election, profits and losses are passed through to the shareholders Legal treatment is different from state to state.  In Pennsylvania, LLCs are subject to Capital Stock Tax and must file the PA 65 in addition to the RCT-101 With the S election, profits and losses are passed through to the shareholders, but the LLC is subject to Capital Stock Tax and must file a PA20S and an RCT-101 The Entity itself is not taxed, profits and losses pass through to the partners. Form PA65 must be filed with the State of PA Personal Liability of the Owners Generally no personal liability of the members Generally no personal liability of the shareholders Generally no personal liability of the members Generally no personal liability of the shareholders The general partner (a corp. or LLC) has unlimited  liability, and the limited partner's liability is limited to their investment Operation in multiple states Legal treatment varies from state to state Treated consistently from state to state Legal treatment varies from state to state Legal treatment varies from state to state Treated consistently from state to state Cost More expensive than sole proprietorships and general partnerships More expensive than sole proprietorships, partnerships and LLCs More expensive than sole proprietorships and general partnerships More expensive than sole proprietorships, partnerships and LLCs Partnerships file a Federal 1065 and in Pennsylvania, a PA 65; and the General Partner must file corporation or partnership tax returns annually also Formation Simpler than an S Corporation - may be formed in one step General corporation must be formed first, then the Federal and State S Corporation status may be elected Articles of Organization and Incorporation and an Operating agreement Articles of Organization and Incorporation and an Operating agreement, Entity Classification form -  then Federal and State S Elections Limited Partnership agreement and certificate of authority, Management  Agreement, Articles of Organization and Incorporation Employment and Other Taxes A single member LLC is a disregarded entity for federal purposes, and members generally pay self-employment taxes on the profits of the business Shareholders can save on employment taxes by taking distributions in addition to a reasonable salary, but must pay unemployment taxes Profits and losses of the business pass through to the members, and are generally subject to self-employment taxes Shareholders can save on employment taxes by taking distributions in addition to a reasonable salary, but must pay unemployment taxes Profits and losses of the business pass through to the limited partners and are generally not subject to self-employment taxes; also, no PA capital stock taxes Tax Returns LLCs must file a federal return consistent with the type of entity recognized by the IRS, and in Pennsylvania, the RCT-101 S Corporations file a federal S Corporation return, and in Pennsylvania, the RCT-101 in addition to the PA S Corporation return, PA20S Partnerships file a Federal 1065 and in Pennsylvania, a PA 65 and RCT-101.  Member distributions also reduce book income for PA CST purposes. S Corporations file a Federal 1120S and in Pennsylvania, the PA20S and RCT-101 Partnerships file a Federal 1065 and in Pennsylvania, a PA 65; and the General Partner must file corporation or partnership tax returns annually also Business Management The Operating Agreement states how the business is to be managed, and a Manager can be designated Overall management responsibility lies with a Board of Directors, and Officers have day - to - day responsibility The Operating Agreement states how the business is to be managed, and a Manager can be designated The Operating Agreement states how the business is to be managed, and a Manager can be designated Limited partners are prohibited from participating in the management of the business, and the general partners manage the day - to - day business Ownership Only one member is allowed Up to 100 shareholders are allowed, and only one class of stock may be issued Unlimited number of members are allowed Up to 100 shareholders are allowed, and only one class of stock may be issued At least one owner must be a general partner and at least one owner must be a limited partner