What Type of Business Is an LLC: Everything You Need to Know
A limited liability company (LLC) is a hybrid of the corporate, sole proprietorship, and partnership entities.3 min read
Some people confuse LLC business type for a corporation. Bred by combining features from other business entities, the LLC structure is its own type of business entity. An understanding of the LLC structure as well as the other structures is an essential piece of weighing the risks and the benefits.
Types of Business Entities: Sole Proprietorship
A sole proprietorship is the most straightforward business structure. A sole proprietorship is a one-person shop — there is one owner responsible for running the company. Hence, the owner is one with the company and liable for any judgments and debts from business transactions. The owner's personal property is not protected from business debt or lawsuit. As the business grows, the owner's risk increases.
Types of Business Entities: Partnership
A partnership has two or more owners. There are two types of partnerships:
- General Partnership. In a general partnership, both owners share in the business management and the profits are shared equally.
- Limited Partnership. A limited partnership is one where one partner runs the business while the other partner is a silent investor.
In a general partnership, both owners are held liable for the decisions the other partner makes. If someone sues your partner, you are included in the suit as well.
Types of Business Entities: Limited Liability Company (LLC)
A limited liability company is a hybrid of the corporate, sole proprietorship, and partnership entities. LLCs gives their owners (known as members) liability protection. In most circumstances, if the LLC is sued or a creditor was granted a judgment against the company, the members' assets are not at risk. However, if a member acts illegally or irresponsibly with business affairs, then that protection is lifted. An LLC also enjoys pass-through taxation. Though an LLC is an entity on its own, it is not subject to taxes like a corporation. Instead, the taxes flow through the LLC to its members.
Types of Business Entities: Cooperative
A cooperative is a particular kind of corporation. Cooperation is owned by shareholders; however, in a cooperative, the employees or the customers own the business. In other words, the business is owned by the people who work at the company, or the product or service-end users.
Types of Business Entities: Corporation
A corporation is considered an entity separate from its owners (called shareholders). The corporate structure has a board that manages the company's strategic direction, mission, and goals. Because it is its own entity, the corporation can do the following:
- Party to a lawsuit.
- Buy and sell property.
- Buy and sell stock.
Although an LLC is its own business type, it inherits the liability protection trait from the corporate entity.
Factors to Consider
People decide to go into business for several reasons. Consider your lifestyle, industry, and personal preferences before selecting your business format.
- Vision. Are you hoping to have a business with the freedom to grow? Or do you want your company not to grow beyond a specific size? Consider whom you would want to run your company. Will you need outside investors, etc.? If you envision unlimited growth potential, you may want to consider a corporation. You can create a simpler entity with plans to convert in the future.
- Organizational Structure. How formal do you want your business? Do you want the freedom to run it as you see fit? Is It just you and a friend going into business and you want to see "how things go?" Do you have the finances to make sure your business has professional representation? Typically, the more complicated your business, the higher the risk and the cost to manage the risk.
- Liability. Are you running a company that is high-risk for a lawsuit? Is your company more of a hobby with minimal risks? If you need liability protection, then consider a corporation or an LLC.
Have a clear understanding of what you want so that you can compare each structure to your needs. Starting a business comes with risks. You can minimize that risk by evaluating the choices. Even with the simplest structure, this task can overwhelm you. Talk to your business professional or call your secretary of state offices to understand your options.
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