Okay, last time we explored several types of business entities, which a small business person might consider. We briefly looked at the sole proprietorship, the general partnership, and the limited partnership as a means to protect your assets in the business world.
Today, let’s look at how C-Corporations, LLCs, LLPs, and Closed Corporations differ.
- The C-Corporation is a business entity that is separate from its owners, so long as all corporate formalities are adhered to, such as timely filing of appropriate documents, maintaining minutes and resolutions, holding annual shareholder meetings, and meetings. Essentially it acts as an artificial person who conducts business to carry on business. As long as all formalities are satisfied, there exists a layer of protection from liability, which stands between the injured party and the shareholders. Each shareholder owns stock in the business, and a Board of Directors runs the business. A disadvantage of a C-Corporation is that it is double taxed.
- Limited Liability Company (LLC) is a flexible form of doing business. It allows the owner of an LLC to be taxed as a corporation or as a partnership. Each state sits own requirements, among them are that an LLC can be managed by a member of the LLC or managed by a nonmember manager. Certain types of businesses cannot be an LLC. In some states, such as California, an LLC can have just one member. An LLC can be taxed as a corporation, a sole proprietorship (if there is only one member), or a partnership.
- Limited Liability Partnerships (LLP). This form of business entity varies from state to state, and in some states such as California this entity may only be used for licensed professions, e.g., lawyers, architects, and accountants. Your local secretary of state web site will have the appropriate documents to file.
- A Close Corporation is a unique form of business. It’s similar to a C-Corporation in some respects, but in other respect has many more restrictions. It is limited to the number of shareholders, the type of shares and class of stock, who can be a shareholder, and in some instances must elect a calendar year as its fiscal year. All of the shares are owned by a small number of shareholders, usually management or family. The owners of a Closed Corporation elect to be treated as a partnership for tax purposes by the IRS under Subchapter S. Profits and losses are reported through the owners’ personal tax returns instead of being taxed as a corporation. It also allows the benefits of the limited liability of a corporation and the tax benefits of a personal tax rate.
Here are a few quick tips.
1. If liability protection is the most important thing to you, consider:
- C-Corporation
- Closed Corporation
- LLC
- LP
- LLP
2. If management and control of the business are most important, consider:
- Sole Proprietorship
- LLC
- LLP
- C-Corporation
- Closed Corporation
3. If favorable tax treatment is most important, consider:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- LLC (if you elect to be treated as a partnership)
- LLP (if you elect to be treated as a partnership)
- Closed Corporation
Hope this gives you a little information, so you can begin to ask the right question—which entity is right for me? Until next time, protect your assets!
