Entity Checklist

Choosing the Proper Entity

Choosing the proper type of entity in business is like choosing the proper spouse in personal life. We need to ask many questions, summarize the facts, realize that we don’t know what the future holds, then make a decision on the facts while listening to our gut (professional judgment). It is also critical for businesses that are newly created or in a state of transition that the business owners evaluate a set of confusing federal and state tax and legal issues and consider personal issues when deciding what type of entity their business should be. This section is designed to give the tax practitioner the tools he or she needs to steer our clients through the issues.

Failure by the practitioner to fully understand the attributes of each business form can result in a recommendation which can cost the client additional tax dollars, reduce or limit employee benefits and increase malpractice potential in the case of business failure.

The following information is a two page Comparison of Entities Checklist that you can use to compare the difference between the six major choices in entity selection.

Item	Characteristic	Sole Proprietor	Single Member LLC	“C” Corp.	“S” Corp	Partnership	Multi-Member LLC
	Title	Owner	Member	Shareholder	Shareholder	Partner	Member
1	Limited Liability	No	Yes	Yes	Yes	No (a)	Yes
2	Lower Audit Profile	No	No	No	No	Yes	Yes
3	Continuity of Life ( c )	No	No	Yes	Yes	No	Maybe
4	Centralized Management ( c )	Yes	Yes	Yes	Yes	Maybe	Maybe
5	Free Transferability of Interests ( c )	No	No	Yes	Yes	No	Maybe
6	Number of Owners	1	1	1 or more	1 to 75	2 or more	2 or more
7	No Restrictions on Ownership	Yes	Yes	Yes	No	Yes	Yes
8	Can Easily Select a Fiscal Year End	No	No	Yes	No	No	No
9	Can Deduct 100% of Owner’s Health Ins.	Yes	Yes	Yes	Yes	Yes	Yes
10	Can Deduct Owner’s Portion of Group Term Life up to $50000	No	No	Yes	No	No	No
11	Able to Use Lower Corp. Tax Rate	No	No	Yes	No	No	No
12	Able to Compensate an Employee With Equity	No	No	Yes	Yes	Yes	Yes
13	Can Split Income With Family Members	No	No	Yes	Yes	Yes	Yes
14	Double Tax-earnings, Liquidation & IRS Audit Adjustments	No	No	Yes	No	No	No
15	Can Avoid FICA Taxes by (A) Distributions or (B) Paying Children Under 18	(A) No (B) Yes	(A) No (B) Yes	(A) No (B) No	(A) Yes (B) No	(A) No (a) (B) Maybe	(A) Maybe (B) Maybe
16	Subject to: (A) Distributions (B) PHC & AE Tax	(A) Yes (B) No	(A) Yes (B) No	(A) Yes (B) Yes	(A) No (B) No	(A) No (B) No	(A) No (B) No
17	Able to Deduct Business Loss on Individual Return	Yes	Yes	No	Yes	Yes	Yes
18	Can Transfer Assets ‘Tax Free’ Where 80% Control Test is Not Satisfied	N/A	N/A	No	No	Yes	Yes
19	Can Increase Basis by ‘Set-up’ Election	N/A	N/A	N/A	No	Yes	Yes
20	Can Specially Allocate Items of Income & Expense	N/A	N/A	N/A	No	Yes	Yes
21	Can Deduct Interest on Money Borrowed to Invest as Business Interest	Yes	Yes	No	Yes	Yes	Yes

25	Can Transfer Assets ‘Tax Free’ where debt > basis	N/A	N/A	No	No	Yes (d)	Yes (d)
26	Basis for Loss Includes Owner’s Share of company Debt	N/A	N/A	N/A	No	Yes	Yes
28	Qualities for Ordinary Loss Under Section 1244	No	No	Yes	Yes	No	No
29	May Offset Active Income With Passive Losses	No	No	Yes	No	No	No
22	Can Use Cash Basis Even if Sales > $5,000	Yes	Yes	No (b)	Yes	Yes	Yes
23	Inexpensive to Form & Maintain	Yes	Yes	No	No	No	No
24	Able to Deduct Expenses Paid Personally in computing AGI	Yes	Yes	No	No	Yes	Yes
27	Existence of Reliable Case Law	Yes	No	Yes	Yes	Yes	No
30	Can Easily Distribute Back the Owners Investment	Yes	Yes	No	Yes	Yes	Yes
31	Home Office Deduction	Yes	Yes	No	No	Yes	Yes
32	Avoid Payroll Taxes & Administration (if no employees except owner)	Yes	Yes	No	No	Yes	Yes
33	Can Deduct Medical Costs	Yes (e)	Yes (e)	Yes	No	Yes (e)	Yes (e)
	Note: A “Yes” answer suggests a favorable response. A “No” answer suggests an unfavorable response.	(a) Yes if a limited partner	(b) Except certain farms & PSC’s	( c ) Unimportant with check the box Regs.	(d) Yes unless partner basis is zero	(e) Sec. 105/106 health insurance plan	Other considerations: State Tax Issues. Entities Permitted. Multi-state Capabilities. Estate Issues. Retirement Issues.