C Corporation
Generally speaking, a corporation is a separate legal entity. It is
a separate taxpayer, filing separate returns and pays taxes at
corporate rates. It can involve one or more investors or
shareholders who, generally, are not at risk for corporate
liabilities beyond their investment. Any corporate losses are
"locked into" the corporation and cannot be used to offset other
income of the individual shareholders.
S Corporation
This type of corporation represents a mix of corporate and general
partnership characteristics. As with a C corporation, it can be
comprised of one or more investors.
An S corporation generally offers three advantages: (1) shareholder
liability is limited; (2) corporate income and losses pass through
to the shareholders and are reported on their individual tax
returns; and (3) investors can actively participate in the
management decisions. S status is elected by the corporation and its
shareholders by filing with the IRS. However, establishing the
organization requires a professional's assistance and the associated
costs could be significant in relation to the investment.
Additionally, there are certain technical requirements for electing
S status which cannot be met in every instance.
Limited Liability Corporation (LLC)
An LLC offers some of the desirable features of a corporation and a
partnership, yet eliminates the normal restrictions. The LLC
provides for pass-through tax treatment while maintaining limited
liability, even for those who manage the business. Rules regarding
allocation of gains and losses generally are more flexible than
those pertaining to S corporations, and administrative requirements
may be less burdensome.
LLCs are recognized in most, but not every, state. Rules regarding
their operation and treatment vary. In some instances, it is
possible for a limited liability company to be denied its
pass-through tax treatment.
LLCs are becoming the entity of choice for many horse owners, but
the decision to use this form should only be made after consulting
your tax and legal advisors.
Limited Liability Partnership (LLP)
Although very similar to a general partnership, the LLP varies in
that each partner is not vicariously liable for the wrongful acts of
other partners. Only the partner or partners who performed the act
that causes harm or incurs an expense are liable for its
consequences. Furthermore, partners are able to actively participate
in decisions if they so choose.
Pass-through tax treatment applies as it does with general
partnerships. The main drawbacks are the administrative requirements
and expense. Given that this form of business entity is a relatively
new entity, it may not be recognized in all states. Therefore, the
limitation of liability may or may not be effective when a limited
liability partnership is operating outside the state in which it was
created.
