You have a business idea and want to take your ideas from concept to reality. The first step is to form a business. This first step can have long-lasting consequences for you and your business, so it should not be taken lightly. Speaking with an attorney can help you understand the differences between partnerships, LLCs, and corporations. You can then make an informed choice for your future company structure.
What Is a Partnership?
A partnership is an agreement between multiple parties to go into business together. Each partner will own a percentage of the business. There are several types of partnerships.
- General partnerships
- Limited partnerships
- Limited liability partnerships
- Limited liability limited partnerships
Each partner in the partnership contributes, so they share in the profits and losses. Each partner may contribute by physically working or by supplying financial assistance. However, this also means that the partners are personally liable for the partnership’s and the partner’s actions. A limited liability partnership allows inactive partners to avoid some liability.
A partnership is ideal for someone who doesn’t have a lot of capital and is looking for an easy entity to form. This advantage is coupled with increased self-employment taxes.
What Is an LLC?
Unlike a partnership, a single individual can form an LLC. This entity is like a hybrid between a partnership and a corporation. With an LLC, the founding members are afforded personal liability protection. The formation is simple, with just a few forms required for filing. Once correctly formed, the members enjoy personal liability protection and more flexible taxation options.
There are some drawbacks to forming an LLC. First, additional capital cannot be raised through an IPO like you could with a corporation. There are more startup costs than when forming a partnership. It can also be difficult to transfer ownership later on. Finally, you may also have self-employment tax liabilities.
What Is a Corporation?
A corporation is what most people are familiar with when they think of a business. Instead of having an owner, partners, or founding members, there are shareholders or stockholders. There are several types of corporations to choose from, but C-corps and S-corps are the most common. A C-corp pays its own taxes and offers multiple stock classifications. S-corps have a single stock classification and limit shareholders to 100. Unlike partnerships and LLCs, the stockholders are not typically involved in the day-to-day management of the business. The Securities and Exchange Commission (SEC) regulates corporations in the United States.
The advantage of forming a corporation is the ability to raise large amounts of capital. There are also several tax benefits available. For example, in some states, C-corps are not taxed, and S-corps provide self-employment tax relief.
The most significant drawback of corporate formation is the cost. It can be costly to form and maintain your corporation. They are also heavily regulated, and you face heavy fines if you don’t comply. You’ll also need to hire financial experts because you could be subject to double taxation.
Form the Correct Company Structure
There is no simple single correct answer for all situations. Choosing a business entity for your next venture depends on several factors. Carefully consider your options and the consequences of your choice. It is easier to choose the correct formation from the start than to go back and make a change later. A partnership offers hassle-free formation but increases personal risk. An LLC provides more personal liability protection with a simplified tax responsibility. A corporation has more red tape during formation but can offer tax benefits.
Speak with an attorney about your plans to form a business to ensure you choose the correct company structure.
