Corporations, Partnerships and Limited Liability Companies |
Posted: March 6, 2017 |
The terms Corporation, Partnership and Limited Liability Company (or “LLC’) are often used interchangeably. However, there are significant differences among these legal entities. Although it’s easy to form a business entity without consulting a Corporate Law Firm, if you have or are starting a business, you should understand what each of these are and what benefits and drawbacks exist for each one.
Corporation: The best way to understand a corporation is to think of it as a separate, legally recognized person. Although the procedure varies by state, corporations are usually formed by filing papers called "Articles of Incorporation" with the Secretary of State. The state then issues a Certificate of Incorporation, and the corporation is formed. The corporation can operate a business, hire employees, own property and borrow money. A corporation is owned by individuals who are issued shares of stock in the corporation. The main advantage to a corporation is limited liability to the shareholders. So, with some exceptions, obligations owed by the corporation, such as loans or judgments for breach of contract or personal injury, can only be imposed on the corporation and not on the shareholders. However, there are tax consequences. A corporation’s income is taxed. Profits from the business are then distributed to the shareholders through stock dividends, which are also taxed. Thus, money earned by a corporation is subject to double taxation. Nevertheless, the IRS will allow a corporation to become an “S-corporation” which can eliminate this double taxation. Partnership: A partnership can be formed with much less formality than a corporation or an LLC. Two or more people can simply agree to conduct a business as a partnership. Further, there are no formal meeting or reporting requirements, and there is no “double taxation” issue. The main drawback of a partnership is that the partners aren’t entitled to the limited liability enjoyed by corporation shareholders. This means that all partners are potentially fully liable for all debts incurred by the business, including not only things like loans but possibly personal injury judgments if related to partnership business. Even partners not involved in incurring or causing the debt may be required to pay the obligation out of personal assets. This liability may, however, be avoided to some extent by use of a limited partnership. A limited partnership must be registered with the state. Limited Liability Company: An LLC combines characteristics of both corporations and partnerships. Formal steps are required to form an LLC, which include filing Articles of Organization with the state. The requirements of conducting business as an LLC are less formal than a corporation, but an LLC still provides limited liability to the owners, shielding them from the LLC’s creditors in almost all circumstances. However, like a partnership, an LLC allows for profits to be paid to the owners without double taxation.This article is intended only to give a very brief overview of these business entities. Each circumstance should be analyzed by an expert to determine which might be best for your situation. Attorneys at a Corporate Law Firm understand the law and the tax implications relating to business formation, and it is in your best interests to seek the advice of such a professional before making your decision.
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