Businesses can be as small as one person or they can span the globe, but they all start off as paperwork. The primary considerations in forming a corporation or a partnership lie in tax requirements and the question of liability. The main differences among limited liability companies, limited liability partnerships, S corporations and C corporations have to do with determining how much money goes to the Internal Revenue Service, when profits are taxed and who is responsible for the taxes.
A limited liability company is a flexible incorporating option, but the option is not available to all businesses nor are the regulations the same in all states. Generally, the IRS considers LLCs to have “pass-through” status, which allows all profits and losses from the business to pass to the owners and be reported on their personal tax returns. LLC owners are protected from personal liability for debts or claims attached to the business and stand to lose only what they invested in the business. LLCs essentially offer protection similar to that of corporation shareholders, but with simpler taxation and management.
Limited liability partnerships are businesses with more than one owner who all have limited personal liability for business debts. LLPs are primarily used by licensed professional groups, such as attorneys and doctors, and some states do not permit any sort of business apart from licensed professionals to form an LLP. A partner in an LLP is protected from personal liability in the case of debt or claims accrued by another partner, keeping personal assets from being used to pay for the mistakes of another. LLPs are easier to organize and manage than a corporation, making them preferable for professionals who just want protection for their personal assets.
S corporations are not legal business structures. The IRS grants S corp status to qualifying C corporations, and the change in status affects the taxation of the corporation’s profits. Intended for small- to medium-sized domestic businesses, S corporations cannot have more than 100 shareholders. Shareholders never have personal liability for business debt, but they pay personal income tax on any dividends or salaries drawn from the business. S corps are not required to pay corporate taxes; like LLCs, they are "pass-through entities" and all losses and profits go through to the corporation's owners. As a corporation, however, an S corp must perform a variety of bureaucratic duties to remain compliant, including issuing stock, passing bylaws and holding shareholder and director meetings with accurate minutes.
Read More: Can an LLC Own a C Corporation?
C corporations are generally favored by larger companies due to the improved flexibility provided in comparison to S corps. C corps may have unlimited shareholders and have different levels of voting privileges among those shareholders, making it easier for C corps to grow and expand their shares. Like S corps, C corp shareholders must pay personal income tax on earned dividends, but unlike S corps, C corps also pay corporate taxes, opening the possibility of being double-taxed. C corp shareholders are not generally responsible for any business liabilities. As a corporation, C corps are subject to the same management and regulation compliance requirements as S corps.
Jeffrey Joyner has had numerous articles published on the Internet covering a wide range of topics. He studied electrical engineering after a tour of duty in the military, then became a freelance computer programmer for several years before settling on a career as a writer.