What is the difference between sole proprietor and s corp

Since you are one and the same, your financial capability is reflected on how much capital the business has, which is in effect limited. You are in full control of all business decisions; however, you may face difficulties raising enough capital and lack continuity whenever you are absent. It can therefore sue or be sued in court. The corporation pays taxes on its own and can easily draw capital from a number of sources, such as selling shares to the public.

It has a perpetual life, meaning that it cannot cease to exist even if its members die. However, a corporation is more regulated than a sole proprietorship, is expensive to start, and has to keep elaborate records of its activities.

Unlike a sole proprietorship that is managed by the owner, corporations are managed by directors. Before making your decision, do your research and calculate the pros and cons. It's also advisable to seek tax and legal counsel to help determine the best choice for your business. Small Business Administration. Internal Revenue Service. National Federation of Independent Business.

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As a corporation, S corporations must file official state and federal documents. These include not only articles of incorporation but also corporate minutes.

S corporations must also hold regular shareholder meetings and pay additional government fees. If overlooked, failure to comply with the corporate formalities may result in a loss of liability protection in the future. Specifically, a court may elect to treat the business as a sole proprietorship for liability purposes. When a small business begins operation without any formal legal filings, it is a sole proprietorship.

A sole proprietorship has flow-through taxation, but it also has unlimited liability, which means that the sole proprietor's personal assets are at risk for any liability incurred, including by employees. An LLC provides the tax advantages of the sole proprietorship but limits member liability. The personal assets of a member are not at risk due to the liability incurred by employees or fellow members. The S corporation provides similar tax advantages and limits liability.

However, it is more formal. In order to maintain corporate status and limited liability, the S corporation must meet state and federal requirements, including regular shareholder meetings and the appropriate documentation. This portion of the site is for informational purposes only.

The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law. By Jeffry Olson, J.