Choosing the best business entity for your particular business can be overwhelming. Understanding the differences between each type of entity often confusing. Take a look at this overview to get a stronger grasp on the legal features that accompany each business entity, as well as a few of the pros and cons for each.
The two most common type of business entities are a corporation and a limited liability company.
Corporations are creatures of state law, and are their own legal person. Characteristics of the corporation include limited liability for the owners, a separation of ownership from management and the requirement to follow certain formalities (annual meetings, minutes and books).
Unlike the LLC, a corporation, or “C-Corp”, is independent from its owners in terms of both liability and taxation. The corporation has only two options for tax treatment, the standard c-corp, also known as “double taxation” and the s-corp. With a corporation you can have an unlimited number of shareholders, but you must hold annual meetings and record minutes. Corporations are also generally easier to transfer to third parties and more conducive to raising of capital.
Limited Liability Companies are also creatures of state law and are their own legal person. Aspects of the limited liability company include limited liability for the owner and tremendous flexibility in its governance. Unlike corporations, LLCs are not required to hold yearly meetings or record meeting minutes. An LLC can be owned by one person or multiple people, with no limit on the number of owners. Taxation works similarly to a sole proprietorship if you’re the only owner or a partnership if there are multiple owners. However, you have the option to select the tax treatment right for you. Operating agreements govern the LLC’s actions, help it run more smoothly and provides the opportunity for succession planning. Limited Liability Companies can also offer stronger protection against personal creditors.
In summary, the key distinctions between the corporation and the limited liability company are related to the protections against creditors, tax treatment options and the transferability of ownership.
In addition to limited liability companies and corporations, there are other possible business entities including sole proprietorships, general partnerships, limited partnerships, and limited liability partnerships. These types of business entities do not offer the same level liability protection as limited liability companies and corporations and are not used nearly as often. However, under specific circumstances, they may be absolutely appropriate.
Maybe you already know the right type of business entity for your business and just need help with the corporate documentation or maybe you have no idea where to start. No matter what stage you’re at in the planning process, you should ask a qualified attorney for assistance. The minority certified law firm of Ser & Associates can help you work your way through the maze of corporate entity options and assist you in choosing the one most appropriate for you and your business.
