How to Choose the Right Type of Business Formation: Understanding the Differences Between an LLC, Partnership & Corporation

business lawyer
6 Reasons You Need to Hire a Business Lawyer (Even if You Don’t Think You Do!)
November 20, 2018
estate planning attorney
The Important Questions You Should Ask Your Estate Planning Attorney
November 24, 2018

How to Choose the Right Type of Business Formation: Understanding the Differences Between an LLC, Partnership & Corporation

business formation

When you first start a business, you’re probably imagining how you’re going to change the world. People don’t start companies because they want to sift through paperwork. They do it because they want to make something that people need.

Yet, there are still many, lengthy, legal processes that all budding entrepreneurs need to go through. And one of the most important processes is deciding which business formation they want to take.

The three major kinds of business structure are LLC, partnership, and corporation. They all formally recognize companies as businesses, but the things stakeholders put on the line are radically different. Each business form also drastically changes how losses and profits are distributed.

Keep reading to see whether a partnership, LLC, or a corporation is right for your business!

LLC: Limited Liability Company to Limit Your Losses

LLCs are never corporations. The acronym stands for ‘Limited Liability Company’ and not ‘Limited Liability Corporation’ for a reason. In corporations, all profits and losses are held within the company. In LLCs, they are passed onto the owners.

This means that when you file your tax return, the LLC’s income is filed as your own. However, if the business falls too deep into debt, you don’t need to stake your own property to pay it back.

Owners also directly own the company, unlike corporations. In corporations, owners are people who own stock in the company, rather than the company itself. Since corporations organize ownership this way, it also means that the company needs to file its own taxes.

Corporations: Incorporating Stocks Into The Business Formation

In LLCs and partnerships, the owners directly own the company. All of its profits and losses are a part of the person’s personal profits and losses. However, corporations are different.

Owners don’t directly own the company. Instead, they own stock in the company. While this, de facto, makes the majority stockholder the owner of the company, they aren’t treated like it on their taxes. Instead, the majority stockholder pays investment taxes, and the corporation files its own return.

Incorporating is usually a good strategy for larger companies. The more people involved in a business, the more sophisticated the way power needs to distribute. Stocks are an elegant solution to measure power within the company. It is also a good way of preserving personal assets in case the company goes under.

Partnerships: Going Into Business With Another

Partnerships are a lot like LLCs. The business’s profits and losses are filed as an individual’s personal income and loss. There aren’t stocks being exchanged to measure company power. Instead, owners are clearly designated as owners.

However, the main difference is that partnerships don’t protect personal assets. If a business goes too far into debt and it needs to be paid back, the bank can come after the owners’ personal property.

They’re also an especially informal business formation. They aren’t required to hold meetings or follow the same rules corporations do.

Business Formations Set The Company’s Future

It’s vital to pick the right business formation for you. If you enjoy informal setups where your own personal property is risked, file under a partnership. However, if you want to protect your property, make sure to file as an LLC. And if you think you’re going to grow fast and large, incorporate the company.

No matter which business structure you select, expect a lot of legal paperwork to get through. Starting a company is never an easy process. All entrepreneurs need a strong, professional team to advise and guide them through the first steps of starting their company.

Contact us for a team exactly like that. Sending an email is the first and most important step towards getting your company established.