Corporation vs LLC vs Partnership

With a corporation vs LLC vs partnership, the best choice depends on your short and long-term business goals. One of the most important things to consider is limited liability protection. Limited liability protection occurs when owners are not personally held responsible for debts or liabilities that a business incurs. Legal entities are separate and created through the state filing process.

LLCs offer what’s called pass-through taxation, where losses and profits are paid at the shareholder level, and the entity itself does not pay business income taxes. Also, legal entities are subject to certain ongoing state requirements, such as filing annual reports and paying maintenance fees.

LLC vs S Corporations

An LLC benefits business owners in the following ways:

  • Ownership Benefits: The IRS levies certain restrictions on S corporations, but not with LLCs.
  • No Owner Restrictions: LLCs are permitted an unlimited amount of members. On the other hand, S corps cannot have over 100 shareholders. Also, LLCs permit non-U.S. citizens and residents to become members, whereas S corps only allow U.S. citizens and permanent residents to become shareholders. Further, other entities can own LLCs, whereas S corps do not allow other entities such as other LLCs and corporations to own an S corp.
  • Ongoing Requirements: S corps contend with rigid formalities when compared to LLCs. For instance, S corps must draft by-laws, conduct annual member/shareholder meetings, and record meeting minutes.

LLCs have recommendations in place, but owners are not obligated to follow them. The recommendations include:

  • Drafting an operating agreement
  • Membership issuance
  • Holding and documenting member meetings
  • Documenting all major company decisions

When it comes to management, LLCs owners have greater flexibility in tailoring their management to their own specifications. Owners can choose how they will manage the business, or they can have managers run daily aspects of the business. Regarding existence, an LLC’s lifespan only lasts as long as the members. For instance, an LLC could dissolve if a member dies and withdrawals from the business. This is not the case with S corps, where the entity itself lasts the entire lifespan regardless of what happens to shareholders.

Another plus is that S-corp stock is freely transferable, which is not the case with LLCs. LLC stock is not as transferable because it requires member approval before the transaction can take place. In regards to taxation, an S corp offers a key advantage over an LLC, especially in regards to self-employment taxes. Under an S corp, shareholders can also be designated as employees and take a salary, allowing them to reduce self-employment tax burdens.

Also, shareholders may accept dividends while getting a salary. The shareholder must be given a reasonable salary based on the job that he or she is doing. You would not want to keep your salary unreasonably low to greatly reduce paying self-employment taxes, which could cause a response from the IRS and force you to adjust your salary.

LLC vs Partnership

When it comes to an LLC and partnership, they are similar in many ways. Both are created through registration in the state where the business will operate. A partnership is a business entity that has several co-owners, also known as partners. You would register partnerships with state authorities, and you have several partnership types to choose from, depending on your chosen profession.

Partners share directly in all profits and losses made within the business that’s based on share percentages. This is in stark contrast to corporations, where a business would issue stock. Partnership owner shares may be any percentage, so long as the percentage equates to 100 percent. Before the partnership is created, partners decide the percentage shares before they start the business. Such an arrangement should also be part of a partnership agreement.

In the same manner as an LLC, you would create a partnership at a certain date. With an LLC, however, the entity exists when members file an articles of organization. Another difference between an LLC and partnership is in regards to liability. In a partnership, each partner must share the debts and liabilities of the partnership and must take responsibility for the actions of other partners. On the other hand, LLC members are safeguarded based on his or her share in the business and do not accept responsibility for the actions of other members.

For more information on corporation vs LLC vs partnership, submit your legal inquiry to our UpCounsel marketplace. UpCounsel’s lawyers have graduated from the best law schools in the county and will help you decide which entity is best for you. Also, they will remain at your side so you can utilize tax benefits to your advantage and maintain your business entity so you can keep it in good-standing with authorities.