Forming a new business is an exciting venture thousands of Americans take on each year. According to the Small Business Association (SBA), over 627,000 businesses are formed annually. When forming a new company, it is imperative to legitimize your operations by establishing it as a legal entity. This will help you protect yourself, your partners, and your family. However, the question is, what type of business entity is right for you, and what are the differences? But what’s the difference between an LLC, a corporation, and an S-Corp? Here is a breakdown of the common business entities and the advantages of each.
What’s A Limited Liability Company (LLC)?
A limited liability company, or LLC, is well-known and popular in the United States for the flexibility they offer business owners. An LLC is a legal entity that has characteristics of both a corporation and a partnership/sole proprietorship. Regardless if a person intends to create a partnership or not, if there is an intent to make a profit, then you have entered into a partnership. Therefore, you may be personally liable for any damages for that partnership. To protect yourself and your business, we recommend forming an LLC. You can form an LLC as a single-member business or multiple member business.
By forming an LLC, you can separate your personal and business assets. As a result, if someone sues you for damages, your personal assets will be protected, since they are separated from the business operation. If there is no LLC in place, you may have to use your personal assets to cover the cost of any damages.
For certain business entities, a traditional LLC is not appropriate. There are actually different types of LLCs you can form, depending on your location and your line of business. For example, if you provide professional services that require a certain license, such as, a law firm, you need to form a similar entity called a professional limited liability company (PLLC).
What Is A Corporation?
A Corporation offers similar protections as an LLC; however, it is more suitable if there are multiple stakeholders in the business operation. Forming a corporation allows you to separate personal and business assets, like an LLC. There are different types of corporations, but they usually fall into one of two categories: whether they can issue stock in investors or by whether they are formed to make a profit.
“Stock corporations” are corporations where shareholders or stockholders own a stake in the organization. On the contrary, “non-stock corporations” are corporations that cannot issue stock, and “members” of the corporation are those who own the organization. The right option for you will depend on the type of business and operations.
What is an S-Corp?
An S Corporation, or S-Corp, is a tax designation for a company that abides by specific Internal Revenue Code requirements. An S-Corp allows for income to pass directly to its owners to avoid double taxation, that comes with owning a corporation. In other words, owners of the company report the income or loss on their individual income tax returns, saving the corporation from being taxed.
An LLC can designate the company as an S-Corp. This allows them to prevent the double taxation, which can be extremely financially beneficial.
Which business formation is right for you?
The right business formation for your company is not always a clear-cut answer. It depends on the size, the purpose, and your business offering. If you have questions about forming your business as a legal entity or changing your business structure, contact the Whipple Law Group, PLLC. Our business law attorneys can discuss your options and help you choose the right formation for your company. Reach out to us today.
