LLP vs Corporation: Everything You Need to Know
Choosing between an LLP vs corporation structure is one of the first steps in creating a business entity.3 min read
Updated November 12, 2020:
Choosing between an LLP vs corporation structure is one of the first steps in creating a business entity. You need to decide whether you will want to form your business as a limited liability partnership (LLP) or as a corporation.
Corporations, LLPs, and Other Business Structures
In a corporation, the business is completely separate from the owners and will be designated by having an indicator at the end of its name, such as "incorporated," "limited," or an abbreviation of one of them. To be incorporated, a business must file with the state and pay the necessary fees.
When it comes to taxation of a corporation, the corporation will be required to file a yearly tax return and send in payment for its tax liability. The owners that are shareholders will pay their own personal income taxes on the dividends that they receive from the company. In a corporation, shareholders can also be employees and executives in the company.
An S-corporation is a business election that C-corporations can choose that will change the way their taxation occurs as well as how some of their organization is structured. In an S-corporation, the business will file a tax return but will not pay taxes at the corporate level. The taxes for the business will be paid through the personal income return of the shareholders.
For multiple-owner businesses that do not want to be considered corporations, there are a couple of businesses entity options to choose from, including limited liability companies and partnerships. In these types of businesses, the owners cannot be an employee.
In a single-owner business, the business's proprietorships" rel="nofollow" target="_blank">sole proprietor and owner is the same person. Instead of being a sole proprietorship, you can also be classified as a single-member LLC. If your business is a sole proprietorship, you will not need to register your company with the state.
Which Entity Is Best for Your Business and to Protect Your Assets?
When deciding which business entity is the best for your company, there are many things that you will need to consider regarding both the current situation of your business and your business in the future. These include the following:
- Legal protection
- Business credit
- Raising money
After determining what factors are important to your business and how to best handle each of them, you will need to decide on a business structure:
- Single-member LLC
- Single-member LLC taxed as an S-corporation
- LLC taxed as an S-corporation
- LLC taxed as a limited partnership
What Is an LLP?
A limited liability partnership is a business with at least two owners who will have limited personal liability when it comes to business debts. Some important things to know about an LLP include the following:
- LLPs have to be formed by two or more licensed professionals.
- General partners are protected from the liability of the other partners or employees in the company.
- An LLP would typically be formed by professional groups such as doctors and attorneys.
- An LLP protects each partner from debts and or liability incurred by other partners in the organization.
- LLPs are an easy entity to manage and organize, which makes them a good option for professionals looking for asset protection.
What Is an S-Corporation?
An S-corporation is not a business legal structure but is a tax election that a business can make with the IRS. An S-corporation uses "pass-through" taxation, which prevents taxes at the corporate level and instead has the shareholders pay personal income tax on their portion of the business's profits and losses. Some of the things you need to know about an S-corporation include the following:
- Shareholders must be U.S. citizens.
- Shareholders can only be individuals, estates, and some trusts.
- Shareholders do not have personal liability for the business debt.
- S-corporation must issue stock but can have no more than 100 shareholders.
- An S-corporation is perpetual in existence.
- You can freely transfer stock in an S-corporation.
- S-corporations enjoy "pass-through" taxation.
- You have no self-employment tax liability with an S-corporation.
- FICA and other taxes are withheld from salaries paid to owners who are also employees.
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