LLC C Corp vs S Corp: Everything You Need to Know
Understanding LLC, C corp, vs. S corp helps to decide the right structure for your business.3 min read
2. Limited Partnership
Understanding LLC, C corp, vs. S corp helps to decide the right structure for your business.
Sole Proprietorships and Partnerships
In a sole proprietorship, there is only one owner who has complete control over the business. It involves almost no paperwork. In a partnership firm, there are two or more owners who can mutually divide the control between themselves. It too requires very little paperwork.
Sole proprietorship and partnership structures do not offer any protection against personal liability of owners. Creditors can pursue your personal assets for realizing their dues from the business.
Buying a business liability policy can offer some amount of safety against the risks arising out of lawsuits against your business. Sole proprietorship is suitable for businesses involving low liability, such as freelancing, offering online consultancy, and work-from-home businesses.
To start a sole proprietorship, you only need to obtain local licenses and permits applicable to your business. If the name of your business differs from your legal name, you must get the trade name registered with your county clerk; it usually costs about $100 and is valid for about five years in most of the states.
Procedure for forming a partnership firm is more or less same as that of a sole proprietorship business. It's advisable to execute a formal partnership agreement outlining the rights and responsibilities of partners and procedural details on running the business.
In a partnership, you are liable for business acts and omissions of your partners. Investors are less likely to lend money to partnership and sole proprietorship businesses. Unless otherwise stated in the partnership agreement, a partner can take business decisions on behalf of other partners.
Unlike in general partnership, a limited partnership has one or more special partners, who are known as limited partners. These partners have investment in the business, but they are not involved in its management. Limited partners are not responsible for debts and liabilities of the business. Limited partnership makes it easier to fund the business with outside capital.
General partners hold the authority to make decisions. For creating limited partnerships, you need to file with the state, a Certificate of Limited Partnership. Depending upon the state, the cost of filing this certificate varies from $100 to $200.
An LLC, or a limited liability company, combines the benefits of partnership and corporation. For the purpose of income tax, an LLC still remains like a sole proprietorship or a partnership, depending upon whether it's a single-owner LLC or a multiple-owner LLC.
Forming an LLC entity could incur you some additional state taxes, especially franchise taxes. An LLC does not have to maintain extensive accounts and records like a corporation. It's easy to divide profits, duties, and responsibilities among members. It's not suitable if you plan on raising venture capital.
It's advisable to have an LLC operating agreement. It sets out rights and responsibilities of members and provides regulations for carrying out business operations. For federal tax purposes, an LLC can opt for a C corp or an S corp status.
Most LLCs choose the S corp status since it allows them to include their share of company profits in their personal tax returns. LLC owners are liable to pay self-employment tax of 15.3 percent. Members can choose to manage the LLC either themselves or through elected managers. Sometimes, managers act as investors' representative in running the company. In a manager-managed LLC, owners don't have a direct role in the governance.
A C corporation is the default structure when you form a corporation. Unless you elect the S corp status, your corporation continues to be a C corporation. A C corporation is a distinct legal entity, different from its owners aka shareholders. C corporation shareholders are not responsible for debts and obligations of the company.
Forming a C corporation makes it easier to raise funds and capital for your business. C corporation formation is costly and involves extensive paperwork. The C corporation structure is suitable for businesses that intend to go public and raise outside investment.
Forming a C corporation usually involves the following steps:
- File Articles of Incorporation.
- Prepare company bylaws.
- Appoint a board of directors.
- Issue share certificates to founding members.
- Get licenses and permits applicable to your business.
- Apply for Employer Identification Number (EIN).
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