Entrepreneurs starting a new business have a lot of options available to them when deciding which type of business structure is best for their new company. There are significant benefits and certain drawbacks associated with each of the various types of legal entities that an entrepreneur can choose as the ideal business structure for their company. Thus, it is critical to understand the various aspects of these different legal entities and whether they may work for your company.
- Limited Liability Company (LLC): An LLC is a business structure that combines elements of both corporate and sole-proprietor or partnership structures to create a dynamic, flexible legal entity that is particularly well-suited for individual owners. LLCs provide their owners with limited liability, meaning that debts and other issues for which a business may be liable are held against the company itself, rather than its owners or shareholders. LLCs also provide an opportunity for pass-through taxation, which means that business revenues and profits aren’t taxed twice (as both personal and corporate income), but rather only once, as income for either the individual owner or member partners.
- Limited Liability Partnership (LLP): Like an LLC, an LLP places a limitation on liability for claims against those involved in the partnership. This type of business structure is particularly popular for professional enterprises, such as law and accounting firms, which may be held liable for those they advise or represent in some cases. LLPs also limit the liability that any one partner may have for actions conducted by other partners. Furthermore, the members of an LLP are not required to pay self-employment taxes.
- General Partnership: Partnerships are designed to be a simple business structure for companies with more than one owner. They require relatively little legal assistance to be formed, and taxes are pass-through, meaning that all income from the company is only taxed once. However, general partnerships render all partners liable for their company’s actions, including debts and court judgments.
- C Corporation: C corporations, like LLCs and LLPs, provide substantial liability protection for the owners of the company, in this case the shareholders. Most large companies choose to follow the corporate model, simply because managing the various facets of taxation and liability for a business of any substantial size is considerably more difficult under other business structures. However, C Corporations are taxed on their income as a company, and the individual owners of the company are also taxed on the income they make as a result, making the overall tax burden for many C Corporations substantial.
- S Corporation: S corporations combine many of the most desirable elements of the various business structures. They provide owners or shareholders with limited liability for corporate debts and other issues, and they allow for pass-through taxation of corporate income. For this reason, many companies have begun to choose this form of business for its convenience and practical benefits.
As each form of business varies, it is important for an entrepreneur to consider the needs of their company along with their needs as a business owner when choosing a business structure, whether it is one of these five main forms or another form not mentioned here.
Nikita Dawson is an avid writer for various legal blogs. She contributes to personal injury, bankruptcy, and business attorney websites.
Good summary, Pete! Of course, it varies from state to state whether all of these entity types are available. I usually advise my clients to do a LLC, as it’s flexible and easy to maintain, but it depends on their needs.
Hi John, thanks for your input on the topic. My company is organized as an LLC and it has been a good fit. I know you have some great information over on http://www.smartbusinessrevolution.com about law related topics and will make sure to check it out. Cheers! – Pete