A limited liability company (LLC) is:
“…a type of business entity that can have one or more owners, referred to as “members.” LLC members typically participate equally in the management of the business unless they elect an alternative management structure called ‘manager management.’”
Why an LLC?
Business owners register their businesses as LLCs to limit the personal liability of themselves and their partners or investors.
How is an LLC different from other business structures?
LLC:
LLCs are the most common type of business in the U.S. “Limited liability” means that the assets and debts of the business are separate from the personal assets and debts of the company’s owner(s).
If the company goes bankrupt, creditors cannot go after the owners’ personal assets (just those of the business).
LLCs have several other beneficial features including:
💠simplified taxation
💠relatively straightforward process to establish one
Sole Proprietorships:
A sole proprietorship is the easiest type of business to set up. A sole proprietorship is an unincorporated business with one owner. Once you embark on a solo side gig, freelance job, or a new business venture, you’re automatically a sole proprietor. If, however, you’re starting a business with another person (or multiple people), you’re no longer a sole proprietorship. Instead, you’ll automatically be a general partnership.
A sole proprietorship’s profits are taxed as the owner’s personal income, and—despite its name—sole proprietorships may hire employees so long as they have an Employee Identification Number (EIN).
Partnerships:
Partnerships are the simplest structure for two or more people to own a business together. The two common kinds of partnerships are:
🔹limited partnerships (LP)
🔹limited liability partnerships (LLP)
Limited partnerships have only one general partner with unlimited liability. Any other partner will have limited liability. Generally, the partners with limited liability have limited control over the company. Profits are passed through to personal tax returns, and the general partner with unlimited liability must also pay self-employment taxes.
Limited liability partnerships give limited liability to every owner. Therefore, an LLP protects each partner from debts against the partnership and they won’t be responsible for the actions of other partners.
Why a Partnership? Partnerships may be a good choice for businesses with multiple owners, professional groups, and groups who are just starting out and want to test their business idea before forming a more formal business.
S Corporations:
An S corporation, sometimes called an S corp, is a specialized type of corporation. A S corp is designed to avoid the double taxation drawback of regular C corps.
Benefits of S Corps include:
💠S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates.
💠S corps have an independent “life” so if, for example, a shareholder leaves the company or sells his or her shares, the S corp can continue doing business undisturbed.
Beware:
💠Some states tax S corps on profits above a specified limit
💠Other states don’t recognize the S corp election at all; instead, they treat the business as a C corp.
Corporations:
A corporation, sometimes called a C corp, is a legal entity that’s entirely separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable.
Corporations offer:
💠strongest protection to its owners from personal liability
However, Corporations are:
- 💠costly to form (higher than other structures)
- 💠stricter with requirements around record-keeping, operational processes, and reporting.