Appendix A: Comparative Tax Treatment of Different Entities

Tax Law

This post is part of a series of posts on the tax implications of different business entity types.

Tax Treatment of Different Types of Business Entities or Forms

Feature C Corporation S Corporation Partnership* Proprietorship
Entity level tax (i.e., two levels of taxation, both to entity and individual owner?) Yes – income taxed to entity under corporate tax and again to shareholder when distributed (as dividends) or realized (as capital gain on sale or exchange of stock) No, except in limited situations involving S corporations that previously were C corporations and carried over income items No No
Maximum number of owners No limit 100 shareholders No limit Not applicable
Classes of equity interests No limit One class of stock No limit Not applicable
Taxability of transfers of property to entity Tax-free, if transferees control (80%) the corporation Tax-free, if transferees control (80%) the corporation Tax-free (basis carries over for appreciated property) Not applicable
Allocation of income and losses Not applicable Based on shareholder’s percentage of stockholdings As provided in partnership agreement, but must have substantial economic effect Not applicable
Deductibility of losses by owner Not applicable Losses limited to basis in stock and shareholder debt (S corporation debt does not increase shareholder basis) Losses limited to basis in partnership, including the partner’s share of the partnership debt Yes
Taxability of distributions of property Taxable as dividend to recipient to the extent of earnings and profits Gain taxed to corporation (allocated to shareholders) and fair market value basis to shareholder- recipient Generally tax-free with carryover basis to the partner Not applicable
Social Security and Medicare tax Corporation pays employer tax on wages paid Corporation pays employer tax on wages paid, but no tax on business income All business income is subject to full taxation All business income is subject to full taxation
*Includes multimember LLCs that have not “checked the box” and elected to be taxed as C corporations.

The content of this and any related posts has been copied or adopted from the Minnesota House of Representatives Research Department’s Information Brief, Taxation and Small Businesses in Minnesota, written by legislative analysts Nina Manzi and Joel Michael.

This post is also part of a series of posts on the tax implications of different business entity types.