Which Corporate Structure is Best for Your Business?

The new year is a great time to start a business. Before jumping into the entrepreneurial pool, educate yourself on the various corporate structures for small businesses. Not only does corporate structure impact the operations of a company, it also impacts the bottom line.   Having the proper structure will ensure both you and your company are properly protected.

The limited Liability Company (LLC): An LLC is a business entity created under state law that can shield its owners from personal liability. LLC’s are becoming the most popular way to start a business because of their flexibility and ease.  

S Corporation Vs LLC: An S corporation shares many of the same tax characteristics as an LLC, however an LLC has fewer restrictions and more flexibility on ownership. An S corporation must not have more than 100 shareholders, all of whom must be U.S. citizens or legal residents.

An S corporation is also subject to more formalities, such as holding annual meetings and keeping corporate minutes. LLCs generally are not required to hold formal meetings, however, an LLC owner may be subject to higher self-employment taxes than a comparable S corporation owner. An S corporation owner is required to pay self-employment tax only on salary, but not on dividends from the corporation.

Partnership Agreement: Is an association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally. The formation of a partnership requires a voluntary “association” of persons who “co-own” the business and intend to conduct the business for profit. A partnership can be formed by written or oral agreement. The  partnership agreement often governs the partners’ relations to each other and to the partnership.

Each partner has a right to share in the profits of the partnership. Unless the partnership agreement states otherwise, partners share profits equally. Partners must also contribute equally to partnership losses unless a partnership agreement provides for another arrangement.

Limited Partnership (LP): An LP, is a partnership of one or more general partners, who manage the business, and one or more limited partners, who invest in the partnership but do not manage it. Unlike partners in a General Partnership (GP), Limited Partners (LPs) have limited liability.

Limited Liability Partnership (LLP): An LLP is a designed business structure for partners who want a voice in managing the firm, but do not want to share liability. In short, a partner in an LLP is not responsible for the liabilities or debts of the other partners.

General Partnership (GP): A general partnership is a quick and simple way to start a business. A partnership can register its business name by filing a DBA “doing business as.” This allows owners to open a bank account and officially conduct business under the name of the partnership. Many business owners however, choose to conduct business through an LLC or Corporation for the added benefits of personal liability protection.

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