What is the Difference Between an LLC and a Corporation?
If you own a small business, one of the first things you need to do is properly set up the business structure behind it in order to protect your assets and protect yourself personally from liabilities.
But how do you choose? There are partnerships, limited liability partnerships, S-corporations, C-corporations, and limited liability companies, and more.
This article will give you a basic overview and idea of what each type of formation entails.
1. General Partnership:
If you are working in a business relationship with someone else and you haven't filed any documents with the Secretary of State yet, this is what type of business structure you have, as it forms automatically at the start of you doing business.
This is an easy formation to maintain, as it is much more relaxed in terms of formal reporting, accounting, and meeting requirements, compared to a corporation.
That said, this type of formation is usually not recommended, because if your business is sued, your personal assets are not separate from your business assets; therefore a large lawsuit against you could take away your personal belongings.
2. Limited Liability Partnership (LLP):
This is similar to a partnership in the sense that it enjoys the relaxed formalities compared to other formations, with the main difference being that the partners are now no longer personally liable for the debts of the partnership.
This is a substantial step-up from a general partnership as your personal assets (such as your house, car, etc) are not insulated from creditors or a lawsuit against your business.
3. Limited Liability Company (LLC):
One of the most popular formations that small business owners choose is an LLC.
This type of formation offers you liability protection so your personal assets aren't implicated in your business activities. It is also desirable because of the relaxed formalities compared to corporations.
An LLC also allows the owner(s) a taxation scheme which may result in less taxes being paid than if the business were formed as a corporation.
This is usually a good choice of formation if you own rental real estate and want to keep the liabilities of the property isolated. There is also a form of LLC called a "series" if you own several pieces of rental property that are producing income.
One of the biggest reasons why companies have historically formed as corporations is to limit the liability of the owners and protect their personal assets. Nowadays, with the introduction of LLC's, a "small corporation" is not as necessary and has been replaced by LLC's almost entirely.
In this type of corporation, there are various formalities which must be followed, such as holding regular meetings of the board of directors, accounting requirements, filing of articles of incorporation, and many more.
Taxation under an S-corp is different in that it distributes its profits or losses to the shareholders, who then are taxed on that income or can make deductions in the event of a loss.
As an S-corp, you issue stock and have shareholders. However, in this formation, you cannot have more than 100 individual owners. So if you have a business which is beginning to grow beyond "start-up" phase and needs a more rigid structure to allow the business to grow, this may be a good option for a medium sized business.
This is the type of formation that is associated with all of largest corporations in business. They have to follow strict reporting and accounting requirements, among other formalities. This is generally reserved for well-established and high-revenue businesses and 99% of small businesses have no use for (and frankly it would be unwise) this formation.
C-corporations are considered their own entity for purposes of taxation, and you now face the possibility of being double-taxed. This is something to greatly consider before deciding to proceed under this formation, and something you will want to talk about with your attorney.
Almost all small businesses are going to want to choose the LLC option. It offers flexibility in formalities and reporting, protects the assets of the individual owners, and has a simple taxation scheme.
How do you know if you are a small business or not? My business law professor once told me that any entity with less than $10 million per year in revenue shouldn't worry about the complexities of being formed as a corporation. This is one man's opinion, but each business needs to be individually evaluated.
Call our Law Office to set up a consultation that can be tailored to your personal needs at 847-707-0774.
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