Incorporating is generally one of the best things a business can do to set itself up for success. However, entrepreneurs new to the process might feel overwhelmed by the options when it comes to business structure.
Should you form a corporation or an S corporation? What’s the difference between a corporation and an S corp, anyway? Are there other, lesser-known entities that might be a better fit for your company? Do some entities need to meet certain qualifications before incorporating a business? These questions ultimately lead to even more questions, as you ask yourself which entity is the best fit for your business, the industry you’re in, and where you operate from.
Ready to thoroughly understand entity formations? Let’s take a look at five entities that could be a great fit for your business to incorporate as.
Limited Liability Company (LLC)
What does this entity do?
Forming an limited liability company (LLC) provides small businesses with liability protection. This kind of protection ensures that personal and professional assets are kept separate.
Why does that separation matter? In the event of an unforeseen circumstance, like a sudden lawsuit that could hold the owner responsible, your business would be designated as a separate, legal entity since its owner formed an LLC. This keeps the owner’s personal assets, like homes and cars, from being impacted. An LLC limits your liability, so the owner isn’t held personally responsible for what happens to the business.
Why should you form an LLC?
LLCs provide a lot of benefits to businesses, including building credibility and a pass-through tax structure. However, one of their biggest draws may be the entity’s flexibility. LLCs are flexible structures, which is appealing to its owner(s). An LLC has the option to be run as a single member LLC, in which there is only one owner. LLCs may also be member-managed and manager-managed. In a member-managed LLC, all members are treated as equals, sharing responsibility for day-to-day operations of the LLC. A manager-managed LLC is run by a board of managers. These managers are responsible for the direction and operations of the LLC on a daily basis.
Related: When Should You Incorporate Your Business?
Partnership
What does this entity do?
General partnerships allow business partners to open up businesses together. In a partnership, partners share profits and losses, share organizational responsibilities and financial requirements, and make decisions together on behalf of the business.
Why should you form a partnership?
If you decide to go into business with a family member or friend, you may want to form a partnership. However, remember that partners in a general partnership do not have any limit on their personal liability for the debts of the business. What if the business becomes responsible for certain debts? In a general partnership, partners may need to use their personal assets to pay for the debts.
Depending on the industry you’re in, you may want to go a step above a general partnership and form a limited liability partnership (LLP). Much like an LLC, an LLP offers its owners a pass-through tax structure. Each partner is also afforded a little bit of extra liability protection.
Keep in mind that not every entrepreneur may be a good fit for an LLP structure. This entity is typically reserved for licensed state professions like doctors, lawyers and accountants. If that’s the industry you’re in, consider opting for an LLP structure over a general partnership. Those not in state-licensed professions, who want to open up businesses like coffeeshops with a partner, may opt for a general partnership instead.
Get Started Today: Incorporate Your Business Through StartupNation
S Corporation
What does this entity do?
Earlier I mentioned that LLCs and LLPs have a flexible pass-through tax structure. An S Corp starts off as an LLC or C Corporation, and is then filed for S Corp status with the IRS. By filing for S Corp status, the S Corp election tells the federal government to tax it as a partnership.
Being taxed as a partnership allows the entity to avoid double taxation. By not paying taxes at the corporate level, S Corps may elect to have profits, losses, deductions and credits “pass-through” the entity level. This ensures they go directly to the owners instead of double taxation through the owners and entity.
Why should you form an S Corporation?
Incorporating as an S Corporation allows entrepreneurs to avoid double taxation — see above for how pass-through taxation works! However, the process for incorporating as this entity does come with specific requirements. Businesses must be based out of the United States, filed as a U.S. corporation, and maintain no more than 100 shareholders.
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Corporation
What does this entity do?
Much like an LLC, forming a corporation provides your business with liability protection. Unlike an LLC, corporations set up a formal structure. This makes it possible to accept money through investors and provide issuance of stock in the business.
Why should you form a corporation?
Thinking of going public or globally expanding your company? This formal structure is designed for entrepreneurs who have big plans for their businesses. It is a little less flexible than its LLC counterpart, so consider evaluating which entity will be the best fit for what you’re doing now and plan to do in the long run.
When it comes down to it, only you know what is best for your business. However, consulting with a professional can be incredibly helpful when it comes to selecting the right business structure for your company.
