LLC Partnership Corporation: Everything You Need to Know
The LLC is a hybrid entity with characteristics of both a sole-proprietorship or partnership and a corporation. So, the limited liability is like a corporation, but the LLC still benefits from pass-through taxation. Each entity is different, so there is not a best option.4 min read
Before you decide on making an LLC as a partnership corporation, you should first consider all your options. How you form your business is one of the most important legal decisions you will ever make. The business structure you choose greatly affects your tax responsibilities and how your personal assets are affected by the business. There are four business entities to choose from: sole proprietorship, limited liability company, or LLC, partnership, and corporation. Before, there were only two forms to choose from: partnership or C corporation. The newer LLC offers the best of each.
The LLC is a hybrid entity with characteristics of both a sole-proprietorship or partnership and a corporation. So, the limited liability is like a corporation, but the LLC still benefits from pass-through taxation. Each entity is different, so there is not a best option. However, your decision about how you organize your business in terms of taxation is not permanent. It can be switched later to a different legal form. For example, many business owners start as a sole-proprietorship. Then, they often switch by incorporating or filing an LLC when they are making more money.
The History of LLCs and Corporations
Corporations and partnerships were the only business entities until 1977. Wyoming passed the very first LLC laws, in 1977. Every state allows the formation of LLC now and has since 1996.
Features of LLCs and Corporations
You form a corporation by filing Articles of Incorporation. The forms are filed by working with the state, usually with the Secretary of State (SOS), and paying all required fees. Corporations are separate entities with their own legal existence, unlike a sole proprietorship. This means the entity can hold property titles, bank accounts, and other assets. They are also allowed to hire employees, borrow money, and conduct any other business a person can conduct legally.
In terms of taxation, there are two corporation types:
Your LLC automatically becomes a C corporation when you form it for tax purposes. The only entity that does not have pass-through tax benefits is the C corporation. Business formed as C corporations pay income tax on net income and the owners file their own separate returns with the IRS, too.
The tax rates for C corporations are often lower than the individual rate of taxes at certain levels. C corporations are separate entities when it comes to paying taxes. So, they may provide employees with fringe benefits that are tax-free. Then it is allowed to deduct the cost of the benefits from income of the corporation as business expenses.
You have the option of your corporation being taxed as an S corporation by filing the proper IRS form for that election. For one person companies, the S corporation is the most popular choice for a corporation, and the result is reduced Medicare and Social Security tax.
Successful companies with high profits may find better benefits as a C corporation. C corporations are not a good choice if you are expecting to lose money in your first few years in business because you are not allowed to deduct the losses from other income you have.
Advantages of Corporations
The main purpose of corporations is to offer protection to owners and shareholders for company liabilities. The benefit is paid for by companies in the form of taxes being charged at the corporate level and on the dividends when the owners file their taxes. Each corporation is made up of three groups: The people who run the business, referred to as "directors;" those who manage the day to day affairs who are called "officers;" and, investors, called "shareholders." Below are a few additional benefits:
- The legalities of corporations are well known because they have been around the longest.
- It is easier to raise capital with a corporation because you can sell stock.
- A corporation provides limited liability protection, meaning they are not personally responsible or liable for the corporation's debts and any lawsuits brought against the corporation.
Advantages of Partnerships
Below are a few of the benefits of partnerships:
- It is extremely easy to form a partnership. When two or more people work together, they form a partnership.
- Furthermore, there are almost no requirements for partnerships, like annual meetings and meeting minutes.
Advantages of LLCs
Some of the benefits of LLCs are below:
- Like partnerships, LLCs have few required formalities, like meeting minutes.
- The management structure is flexible.
- LLCs are easier to form than corporations; they also provide additional flexibility and protection.
With so many regulations, it is often difficult to decide which entity you want to form. If you need help with your LLC, partnership, or corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.