Choosing the right business structure for your business is important for many reasons. You have to consider a business form according to your unique situation that offers flexibility but provides personal liability protection. There are a few legal forms of business that offer both advantages. Corporations, Limited Liability Companies, Limited partnerships and Limited Liability Partnerships offer limited liability options to business owners. In limited partnerships, a general partner will have to assume personal responsibility for all the partnership’s business obligations. Limited Liability partnership limits personal liability of all partners but is restricted to specific professions or businesses in many states.
LLC definition is limitation of personal liability of the business owners. Limited Liability Companies offers limited personal liability and flexibility in management when compared to a Corporation. The member(s) of the LLC have the ease of management and administration of business as in a general partnership without its unlimited liability of partners. Another advantage with LLC is that you can choose the tax classification in which your business is to be taxed. If a single member LLC, you are by default treated as a sole proprietorship. Multiple member LLC’s can elect to be taxed as a partnership, C Corporation or an S Corporation.
Business owners in a Corporation are called share or stock holders and have limited personal liability. The share holder’s liability is limited to the capital invested by them in the business. Corporations are expensive to form and operate as the formalities and procedures involved are elaborate. Formal share holder meetings have to be held, the board of directors and officers elected, the proceedings formally recorded etc. Corporations can be a C Corporation or an S Corporation but the formalities involved are similar. A C Corporation is subject to corporate income tax whereas the S Corporation has pass through taxation. C corps have to pay tax on its income directly and when the profits are distributed to the share holders as dividend, they have to report the dividend as income in their personal tax returns and pay tax on it if applicable. S Corporation advantage is that, the income passes through to the share holders who pay income tax as their personal income.
The main difference between and LLC and a Corporation is that LLC’s are easy to form and operate when compared to a Corporation. In LLC vs. Corporation, LLC continuity is uncertain whereas the corporation has a separate existence from that of its share holders and ownership can be easily transferred. In LLC vs. S Corp, both has the advantage of pass through taxation but the operation of an S Corp. is formal and tedious in comparison.
