A number of tax and nontax factors should be considered in choosing the type of pass-through entity through which to operate a new business

a. S Corporation's are required to pay a franchise tax each year and partnerships are not required to do so. The income of each the partnership and the s corporation is passed through to the individual owners on their tax returns.

b. For a partnership any individual can be a partner and there are no limitations like their are in S corporations. Partnerships have more flexibility in income and profit sharing arrangements than s corporations. S corporations have limited liability and partnerships have unlimited liability.

c. S corporation shareholders are required to take a reasonable salary that is subject to self-employment taxes. After a reasonable salary is taken the shareholders can take distributions from the profit that are not subject to self-employment taxes. This can make the application of relevant tax statues more complex for a s corporation because the reasonable salary can be a gray area. A partnership has more flexibility with taxes. The income is passed to each shareholder.

d. The income passed to the partner earned through a partnership is subject to self-employment tax. The salary paid to a shareholder of a s corporation is subject to self-employment tax but distributions taken from the s corporation are not.