Limited Liability Company (LLC) - Limited liability companies (LLCs) are one of the most flexible types of businesses. LLCs combine aspects of both partnerships and corporations. They retain the tax benefits of sole proprietorships and the limited liability of corporations. LLCs are able to choose between different tax treatments. As long as the LLC chooses not to be treated as a C corporation, it retains its flow-through taxation status.
Corporation - Corporations are a separate legal entity created by shareholders. Incorporating a business protects owners from being personally liable for the company’s debts or legal disputes. A corporation is more complicated to create, as compared to the other three types of businesses. Articles of incorporation must be drafted, which include information such as the number of shares to be issued, the name and location of the business, and the purpose of the business.
- In sole proprietorships and partnerships, if one of the owners passes away or declares bankruptcy, the company is dissolved. Corporations exist as a legally separate entity. Therefore, they are protected from this situation and will continue to exist even if the owner of the business passes away.
There are three main types of corporations: - C Corporation: This is the most common form of incorporation. The corporation is taxed as a business entity and owners receive profits that are then also taxed individually.
- S Corporation: This is similar to a C corporation but may only consist of up to 100 shareholders. S corporations are pass-through entities like partnerships, so profits are not taxed twice.
- Non-Profit Corporation: Often used by charitable organizations, non-profit corporations are tax exempt. All forms of incoming cash flow must be utilized to spend on the organization’s operations or future plans.
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