When deciding on business incorporation, you have five different legal entities to choose from. Most businesses will either form a corporation or an LLC. Business owners usually base their decision on tax and liability issues. By forming a forming a corporation on an LLC, you will generally not be held personally responsible for the obligations and liabilities of that entity. There, are however, exceptions to this, so consulting an attorney regarding this matter can be helpful.
There are several differences between forming a corporation (either an S corporation or a C corporation).
If you form a corporation, you will have:
A separate legal entity that is created by a state filing.
Shareholder liability protection, because shareholders are not typically responsible for business debts.
The ability to easily transfer ownership without having the shareholders’ consent.
A management structure in which the shareholders are elected by the board, and the board appoints the officers. Shareholders may or may not hold management roles. Officers are elected by officials to manage daily business activities.
Internal and external laws that are the same. In forming a corporation, you are required to adopt certain bylaws, as well as issue stock, keep a record of meeting minutes with shareholders and directors, file annual reports, and pay annual fees.
If you form an LLC, you will have:
Generally nontransferable voting and inspection rights for LLC members that do not require a majority consent of the other business members.
A flexible management structure.
Flexibility regarding what can legally be contributed in exchange of ownership interest. LLCs allow for the purchasing of membership interest in exchange for assets.
If you decide to form a corporation, you will have two options. You can either form a C corporation or an S corporation, and the differences between the two are as follows:
C corporations are considered separate taxable entities with the possibility of double taxation if shareholders report business profits that are distributed to them as dividends on their personal income tax return. This means shareholders could potentially be paying taxes on the entity twice. C corporations can have an unlimited number of shareholders, and non-United States resident shareholders are allowed to have multiple classes of stock. If a C corporation is sold, it can only sell stock.
S Corporations are known as pass-through or flow-through entities because their income or losses are divided and passed through shareholders. It is required that shareholders report income or loss on their personal tax returns. An S corporation can only have one class of stock, and shareholders must be residents of the United States. When an S corporation is sold, it cans sell its assets in addition to stock.
Limited Liability Partnership, or LLP, is similar to an LLC because of the fact that all partners have a form of limited liability for business debts, which is similar to the shareholders of an organization. However, with an LLC, partners have to right to directly manage the business. LLPs also allow for pass-through taxation, and have a flexible management structure.
Limited partnership is a partnership between owners in which at least one of the partners is a general partner with unlimited liability, and at least one partner must be a limited partner that has liability limited to their investment amount. A limited partnership also allows for pass-through taxation, and income is not taxed at the business level. This type of partnership is different from an LLP because not all members have limited liability.
A Sole proprietorship is formed when a business owner does not want to have a separate existence from their business. Whoever sets up the company has sole responsibility for debts, and reports profits on their personal income tax. A sole proprietor is able to form an LLC, which would grant some limited liability protection, and still operate as a sole proprietorship for tax purposes.
