Popular Forms of Business Formation
There are many ways in which to incorporate a new business, and each has unique tax and legal implications. Brett Bruner, CPA EA helps our clients sort through the confusion and decide which type of entity best suits their needs.
The most common forms of incorporation are:
Limited Liability Company (LLC)
One of the greatest advantages of an LLC is that the owners or members are shielded from personal liability for the company’s financial obligations. However, the company may be taxed as a partnership, so it is essential that its members report income and deductions related to the business on their individual tax returns. In setting up an LLC, it is necessary to develop an organizational agreement and file articles of organization with the Secretary of State’s office.
Limited Liability Partnership (LLP)
An LLP includes general partners who have management authority and limited partners who invest cash in the company. General partners have personal liability for the firm’s obligations, while limited partners are liable only for the amount of their investment, and they have no management authority. A Limited Liability Partnership is commonly formed with a C or S corporation as a general partnership, and it is not a separate tax-paying entity.
A C corporation is a separate legal entity, so its owners or shareholders have no personal liability for the company’s obligations. The corporation is taxed on its income, and shareholders also must pay taxes on any dividends or income they receive.
Like a C corporation, an S corporation is a separate legal entity, but it differs in that while shareholders are taxed on income they receive from the company, the corporation itself is not taxed. However, a company must meet strict legal requirements to qualify as an S corporation. Both C and S corporations offer good asset protection.