Every form of business has potential risks and liabilities. Choosing the apt legal form for your business depend on the degree of the potential risks. If you operate a business that has minimal risk potential, you may assume the forms of sole proprietorship or a partnership if two or persons are involved in the business. Proprietorships and Partnerships are easy to form and operate. Hardly any legal formalities are required to be complied with. Whatever business permits or licenses needed to operate a business has to be taken care of. The issue with these legal forms of business is that they do not protect the business owner’s personal assets from business debts. If the business defaults payments to creditors or lenders, the business owner will have to settle by using personal resources. This is the reason why you should not remain a sole proprietorship for long.
Business owner’s personal liability to business debts can be limited by forming a Corporation or a Limited Liability Company. State laws have to be complied with for forming both forms of business. There are a few formalities required for the formation. Limited Liability Company can be formed by filing an Articles of Organization with the state department managing business registrations and paying a fee. Limited Liability Company offers personal limited liability protection and flexibility in managing the business operations as in partnership or sole proprietorship. LLC can be constituted with a single member or multiple members. Another advantage with LLC is that it can elect to be taxed as any of the other IRS tax classification that is more beneficial in tax planning.
Forming Corporations entail extensive procedures. As any business entity, Corporations are also formed under state statutes. Procedures and formalities in incorporating your business may vary in each state. Corporations offer the limited liability protection to its share holders. This is the most adopted form of business due to its perpetuity and strict regulations controlling its operations. Lay investors prefer corporations above other forms because buying and selling shares in a corporation is easy. If you have plans for your business to expand beyond the status of a small business, corporations are your best bet. Why incorporate is because of these qualities of corporations. It is easy to attract capital and business continuity is not dependent on its business owners. Corporations can be of two types. S Corporations and C Corporations. Though the legal structures of both are same, there are some restrictions in S Corp business ownership. The taxation differs, S Corps have a pass-through taxation whereas the C Corp is subject to corporate taxation.
The technical LLC definition is a limited liability company, but many people often refer to it as a limited liability corporation. Referring to an LLC as a limited liability corporation is wrong because corporations are a separate form of business that offers their own types of protection to the shareholders. The LLC definition uses the term company because businesses that are LLCs are not incorporated; they are simply a small business.
A limited liability company differs from a c corporation in many respects. One of the main differences between a LLC and a c corporation is stock certificates. Corporations can issue stock certificates to their shareholders because corporations are owned by shareholders. An LLC is owned by members and not shareholders so they do not have a need for issuing stock certificates. By the LLC definition, a LLC cannot go public like a c corporation can. A c corporation can have private shareholders, but it can also choose to take the corporation public later. If you wish to take an LLC public, you will need to form a corporation once you have decided to go public.
A LLC also differs from a sole proprietorship because it offers certain protections that a sole proprietorship cannot. For example, an LLC member is protected from any business debts or liabilities that are incurred during the course of business, unless a personal guarantee has been signed. If your business is considered a sole proprietorship, you will be personally responsible for any business debts and liabilities that are incurred during the course of business. If you have a sole proprietorship, your personal assets can be seized, such as your car or house, to help settle any business debts and liabilities that your business owes. A business partnership also varies from an LLC in the same manner.
Despite its differences with a c corporation and a business partnership, the best way to describe an LLC is a combination of the two types of business structures. The reason for this is that an LLC combines the advantages of a partnership and a c corporation together. By combining the advantages from each business structure, you get the best of both worlds because your business has the protection that is provided to corporations, but is less formal and more flexible than a corporation is. An LLC does not require you to have any bylaws nor does it require you to have meetings. An LLC does not need to have an operating agreement, which is similar to the bylaws of a corporation; it is still a good idea to have one in place.
Part of the LLC definition is the taxation of the LLC. According to the IRS, the LLC is not a valid business structure; it is not recognized by the IRS for federal tax purposes. If you choose an LLC for your business structure, you will need to classify your LLC as a corporation, partnership, or a sole proprietorship for federal income tax purposes. With an LLC, you are receiving a tax advantage because you are choosing how your business is going to be taxed, unless your LLC is automatically classified as a corporation under the IRS guidelines. Most LLCs choose to be taxed as a business partnership or a sole proprietorship because that allows for pass-through taxation and allows you to avoid the double taxation faced by corporations, unless you classify your LLC as an S corporation.
