Businesses can be comprised of only one person or they can be at the other end of the spectrum — multinational companies with thousands of employees, and their needs will vary as far as business structure. The chief considerations in incorporation revolve around taxation and liability. The primary differences among limited liability companies (LLCs), limited liability partnerships (LLPs), S corporations (S corps) and C corporations (C corps) involve the determination of how much is payable to the Internal Revenue Service when profits are taxed and who is responsible for paying these taxes.
A limited liability company is a flexible choice for incorporation. However, this type of entity is not available for all businesses, and LLC regulations vary from state to state. In general, LLCs are deemed to have “pass-through” status by the IRS, permitting all profits and losses to pass to business owners for reporting on their personal tax returns. An LLC protects the owner(s) from personal liability for debts and claims attached to the business, risking only their personal investment. Although providing liability protection similar to what corporation shareholders receive, an LLC has simpler regulations regarding taxation and management.
Limited liability partnerships are business structures comprised of several owners who have limited personal liability for business debts. This business structure is primarily used by groups of licensed professionals, such as doctors and attorneys. A number of states only allow licensed professionals to form an LLP. An LLP partner receives protection from personal liability in the event of debt or claims accrued by another partner of the LLP. Thus, the former’s personal assets are prevented from being used to pay for the mistakes of the latter. Simpler to organize and manage than corporations, LLPs are the preferred choice of licensed professionals who desire the protection of their personal assets.
An S corporation is defined as a “small business corporation”, which has made an election to be taxed as an S corporation. Qualifying C corporations can be granted S corp status by the IRS, affecting the taxation of its profits. S corporations are not permitted to have more than 100 shareholders. S corporations are not required to pay corporate taxes, and their shareholders do not have personal liability for business debt. Any dividends or salaries drawn from the business must be declared on their personal income tax returns. Like LLCs, S corporations are “pass-through entities”, and all losses and profits go through to their owners. In order to remain compliant with corporate regulations, an S corporation must carry out bureaucratic duties, such as passing bylaws, issuing stock, and holding shareholder and director meetings that are recorded with accurate minutes.
Large companies typically prefer the C corporation structure because it offers greater flexibility than that of an S corporation. C corporations are permitted to have an unlimited number of shareholders and various levels of shareholder voting privileges. This allows a C corporation to grow more easily by expanding the number of its shares. Similar to an S corporation, C corporation shareholders are required to pay personal income tax on dividends, and they are not generally responsible for business liabilities. However, in contrast to an S corporation, a C corporation also pays corporate taxes, allowing the possibility of double taxation. To remain compliant as a corporation, a C corporation is subject to similar management requirements as an S corporation.
The Law Office of Edward Lai can assist with the establishment of your company’s formation. If you would like to have a consultation about a legal matter, please visit their website here or call at 510-397-8287.