Final answer:
A sole proprietorship can pay the fewest non-taxable fringe benefits to significant owners, as the business and the owner are seen as the same tax entity. C corporations can offer more to owners who are employees, while S corporations and partnerships have limitations for owner-employees.
Step-by-step explanation:
The entity that can pay the fewest non-taxable fringe benefits to significant owners is a sole proprietorship. In a sole proprietorship, owners cannot receive non-taxable fringe benefits because the business and the owner are considered the same entity for tax purposes. This is opposed to C corporations, S corporations, and partnerships where the business entity is separate from the owners, allowing the potential for non-taxable benefits to be conferred to owners under certain conditions.
C corporations can generally provide the most generous non-taxable fringe benefits to owners who are also employees, such as health insurance, without the benefit being included in the owner's taxable income. S corporations and partnerships have limitations on the deductibility of fringe benefits when it comes to owners who work for the business, especially if they own more than 2% of the company's shares. Tax rules for these entities often treat such benefits as additional compensation, thus making them taxable to the owner-employee.
When you consider forming a business, understanding the tax implications of each structure is crucial, as the larger the profit, the more taxes will be implicated. Each business structure has its own rules that govern how taxes are accounted for and what benefits can be paid to owners and employees.