What Type of Corporation Is an LLC: Everything to Know
An LLC is a mixture of corporate and partnership characteristics, as well as its own features.3 min read updated on February 01, 2023
What type of corporation is an LLC? Some entrepreneurs mistake an LLC for a corporation. An LLC is a mixture of corporate and partnership characteristics, as well as its own features. This relatively new business structure was not widely accepted until around the 1990s. This new entity is still not well understood by new business owners. Some mistakenly believe an LLC is a type of corporation. An LLC is its own kind of business entity that combines beneficial features from other business types.
Different Business Types
There are many business types other than the limited liability company (LLC) entity, including the following:
- Sole Proprietorship. Sole proprietorships have one owner. Unlike an LLC or a corporation, a sole proprietorship is not a separate entity from its owner. The owners report profits and losses on their tax returns. It is pretty simple to start a sole proprietorship since it does not require any state filings. Still, beware that, as a sole proprietor, you are personally liable for company debt and lawsuits.
- Corporations. A corporation is an entity separate from its owners (known as shareholders). A corporation and its shareholder are both subject to taxes (known as double taxation). However, unlike a sole proprietorship, a corporation shields its shareholders from personal liability.
- Subchapter S Corporations (S Corporations). A subchapter S corporation (S corp) is a corporation that is not subject to double taxation. You do not register an S corp with the state; instead, you set up a corporation. When you file with the IRS, you elect an S corp status. There are strict time-based guidelines. Check with your local tax office or tax professional for assistance.
- Limited Liability Companies. A limited liability company (LLC), like a corporation, is formalized through state registration. LLC laws are not as strict as corporate laws. There is flexibility in how they are set up. The IRS does not recognize an LLC as an entity. Therefore, all profit and losses are included in the LLC members' tax returns.
- Partnerships. Partnerships are like sole proprietorships, except they have more than one owner (called partners). Partnerships do not benefit from liability protection — the partners are cumulatively responsible for business debt and lawsuits.
- Professional Corporations (PCs). A professional corporation is a corporation for professionals, such as lawyers, doctors, and accountants. However, PCs do not offer their owners limited liability protection.
- General Partnerships. General partnerships are partners who participate in running the business operations. A general partnership denotes that all the partners are general partners. All partners are responsible for the business debts and liabilities.
- Limited Partnerships. A limited partnership has both general partners and limited partners. Limited partners do not operate in the day-to-day business operations and are not responsible for business debt and liability as a general partner.
- Limited Liability Partners (LLPs). Like its name denotes, an LLP is a partnership created with general partners, and like an LLC, the general partners are protected from any business liability as well as any debts from fellow partners.
Business types vary from state to state. Check with your secretary of state office to get a list of legal entity formations.
What Is Incorporation
Incorporation is the term used to describe the process when converting your sole proprietorship or general partnership to its own entity. The two most popular business entities are a corporation or an LLC.
When Does an LLC Make a Right Business Type?
LLCs were formed to help small business owners. Corporations have regulatory statutes, like having a board of directors, that many small businesses do not need. The following are some valid reasons to form an LLC:
- You are starting a business and expect a loss for at least two years.
- More flexibility in the accounting method you use with an LLC. Corporations do not have such flexibility.
- The liability protection an LLC offers for companies that own real property.
- Flexibility in your management structure and business operations.
LLCs go through the incorporation process, but they are not corporations. While they are their own entity, they enjoy liability protection like a corporation. LLCs are not ideal for all businesses. For instance, if you need outside investors, then you may want to evaluate whether a corporation or an S corp is a better fit.
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