If you’re reading this, you probably have decided to start a business and to incorporate a company in the United States. Congratulations!

Limited Liability Companies (LLCs), C-Corporations, S-Corporations, and Partnerships each have unique characteristics and selecting the right business entity in your situation is a critical decision that can significantly impact your liability protection, taxation, management, and potential for outside investment(s).

Understanding the similarities and differences among these entities, is essential for making informed choices aligned with your business objectives and preferences. With that being said, you should consult with your legal and tax professionals whom can provide invaluable guidance tailored to your specific needs and circumstances.*

Partnerships are business entities formed by two or more individuals who agree to share profits and losses. There are two primary types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have equal responsibility for the management and liabilities of the business. In a limited partnership, there are both general partners who manage the business and limited partners who contribute capital but have limited liability.

Partnerships offer pass-through taxation and flexibility in management and decision-making. However, partners are personally liable for the debts and obligations of the partnership, which can pose a significant risk.

Sole proprietorships are the simplest form of a business entity but are also the subject to the most liability risks. Additionally, they don't have any of tax benefits that other entities can provide as detailed below.

A sole proprietorship is owned and operated by a single individual who does not file to create an entity with a State. From a legal perspective, there is no distinction between the owner and the business, which means the owner is personally liable for all debts and obligations.

C-Corporations are independent legal entities separate from their owners: the Shareholders own the corporation and elect a Board of Directors to oversee major decisions of the Company.

Formation: Forming a C-Corporation involves filing Articles of Incorporation (AOI) with the State, adopting corporate Bylaws, issuing Stock, and appointing Directors and Officers.

Liability Protection: Shareholders of a C-Corporation enjoy limited liability, safeguarding their personal assets from the company's debts and legal obligations. Directors and officers can also be protected from personal liability for corporate debts except in very limited circumstances.

Taxation: The main issue with C-Corporations is that they have double taxation, where the corporation itself is taxed on its profits, and shareholders are taxed again on dividends received. However, C-Corporations can retain earnings and reinvest in the business at potentially lower tax rates.

Formation: An LLC offers a flexible structure, blending elements of Partnerships and Corporations. Forming an LLC entails filing Articles of Organization with a State and crafting an operating agreement. LLCs can have one or more members, and these members can manage the company directly or appoint managers.

Liability Protection: Members of an LLC benefit from limited liability, shielding their personal assets from the company's debts and liabilities. However, they can still be held liable for their own actions or misconduct.

Taxation: By default, LLCs are taxed as pass-through entities, where profits and losses flow through to the members' personal tax returns. Alternatively, LLCs can elect to be taxed as corporations for potential tax advantages.

S-Corporations are C-Corporations that elect to be taxed under Subchapter S of the Internal Revenue Code. This election allows S-Corporations to avoid double taxation like an LLC, with income passing through to shareholders' personal tax returns.

Ownership and Eligibility: S-Corporations are subject to certain eligibility requirements, including restrictions on the number and type of shareholders. Additionally, S-Corporations cannot have nonresident alien shareholders, more than 100 shareholders, or different classes of stock all of which deter outside investments from Angel Investors and Venture Capitalists (VC's).

Taxation: Like LLCs, S-Corporations are taxed as pass-through entities, avoiding the double taxation burden faced by C-Corporations. Shareholders report their share of the company's income, losses, deductions, and credits on their personal tax returns.

Della Torre Law, PLLC