Partnerships, LLCs, and S-Corps...Oh My!!!

First of all let me give the legal disclaimer. This information just touches the surface of the information that you need in order to make a decision for your business. This blog is not your attorney or your accountant or your financial advisor. Please seek legal and tax advice before moving forward with your business planning decisions.

This information is courtesy of the site www.squeezenet.com under their "handy facts" section, sub-section "business". It gives a basic description of the different types of legal business entities.

Corporation
Viewed as a legal, separate entity which can enter into contracts, incur debt, and does pay taxes separate of the owners' personal taxes. As a separate entity it offers some protection to the owners whose personal assets are considered separate of the corporation and therefore cannot be attached or accessed in the case of a suit or other settlement.

"C Corp" (or Regular Corporation) vs. "S Corp"
As described above a corporation is a separate entity recognized by federal and state law and therefore pays separate income taxes. An S Corp has liability protection much like a C Corp, but shareholders can pay income taxes in much the same way the owners/operators of a sole proprietorship or a partnership company does. As with anything dealing with "who pays which taxes" the laws and rules can be tricky. It is always a good idea to consult legal counsel when starting a new business of any kind.

Limited Liability Company (LLC)
Similar to a corporation in that the owners' have immunity from personal liability. An LLC differs from a corporation in a number of ways: it can be easier to set up and maintain from a paperwork/records standpoint, it does not pay separate income tax, and an LLC does not have stock.

Sole Proprietorship
This is by far the easiest type of business to set up but also the one that puts your personal assets at greatest exposure. Essentially, in a sole proprietorship, the business owner and the business are one and the same. The business owner and the business pay the same income taxes. By the same token though, if the business is sued or has some other ruling against it, the business owner's personal assets, whether they were used as part of the business or not, can be attached and appropriated to pay damages or debt. This is where, if you're not cautious, you can lose "the shirt off your back."

Partnership
A partnership is similar to a sole proprietorship in as far as personal liability and taxes go. The difference is that there is more than one owner. There are different types of partnerships. For example, a limited partnership (LLP) consists of a general partner who has management authority etc., and a limited partner who has perhaps given money or property (some financial asset) to the business but is not involved in the day-to-day running of the business. An LLP is a very complex arrangement, it is only allowed in some states and is limited to professionals such as doctors and lawyers who would not want to share in each others' liability but need some of the benefits a company can offer as opposed to private practice.

I hope you find this information useful.