LLC vs Partnership vs Corporation: Which One Should I Choose and Why?

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Originally Posted On: https://mylegaledge.com/index.php?route=extension/d_blog_module/post&post_id=71

Starting a business is an exciting adventure. Most successful people attribute their personal wealth to starting or owning part of a business.

Before you dive in though, there are a few things to consider. Like, finding the right structure for your business?

You’ve heard about sole proprietorships, partnerships, corporations, and limited liability corporations. Yet, you’re a little fuzzy on the details.

Don’t worry, we’ve got you covered. In this article we’ll break down the difference between an LLC vs partnership, or corporation.

The structure of a business largely comes down to four things: operating structure, registration and filing fees, liability, and taxation.

When determining the operating structure, there are a few questions you should ask yourself.

• Who will be accountable for the business?
• Will you have a business partner?
• Will your partner be equal or silent?
• Will you have investors that are shareholders?

Answering these questions will help you determine your operating structure.

Another factor that will determine your business structure is registration and filing fees. For instance, some types of business structures don’t require registration and filing fees, others do.

Depending on how you plan to structure your business will depend on whether you have to meet registration and filing fee requirements.

When most people consider their business structure, liability tends to be at the top of their list. This is with good reason. According to the U.S. Bureau of Labor statistics (BLS):

• 20% of small businesses fail within the first two years
• 45% of small businesses fail within the first five years
• 65% of small businesses fail within the first ten years

These statistics have remained rather static over time. It is stats like this that cause people to think about liability first.

No one goes into business to fail, but all good businessmen understand the importance of hedging financial risks.

Another important factor that people consider when starting a business is taxation. Most people have heard about the fact that many business don’t pay as much in taxes, but does that apply for small businesses? We’ll soon find out.

Now that you understand the four basic components, you can use them to choose what works for you.

The most simple and basic business structure is the sole proprietorship. A sole proprietorship only needs one person to make 100% of the decisions. That is you, the owner.

Most states don’t formally require sole proprietorships to formally register their business. This means you also won’t have to pay filing fees for your business.

A sole proprietor may still have to obtain licenses and permits depending on their business.

The drawback to a sole proprietorship is that because you are the sole owner of the business, you also take 100% of the risk for debts. The owner is also taxed individually.

The net business income or loss is combined with personal income and deductions. These are taxed at individual rates, which are often higher.

Sole proprietorships do not have access to corporate tax credits.

PROS: You don’t have to register, and save money on filing fees. 

CONS: You are liable for 100% of the debts from your business. 

A partnership is just what it sounds like. It requires at least two people (partners): you and a business partner.

Partners are usually equally responsible for business decisions. If you have a limited-partnership, that partner will contribute money without any real say in the business. This is often referred to as a silent partner.

It’s recommended that partnerships register with the Secretary of State Office. They must also obtain licenses and permits needed for the business.

In a partnership, the two business owners may be 100% liable for the company’s debts. This is similar to a sole proprietorship. Each partner is also taxed individually on their personal income tax, just like a sole proprietorship.

PROS: You have a business partner to mull over business decisions and draw investments from for the business.

CONS: You and your business associate still have 100% liability in the company to pay back the debts should the business fail. This splits your risk in half.

Forming a corporation is much trickier than a sole proprietorship or a partnership. It does come with a few benefits though.

A corporation must have:

1. Directors to lead the company and approve transactions.
2. Officers to oversee the daily operation of the company.
3. Shareholders that have ownership in the company.

In smaller corporations it is legal for one person to act as the sole director, officer, and shareholder for the company.

To form a corporation you must file Articles of Organization with the Secretary of State Office. A corporation will have to register the company and obtain licenses and permits for the business.

Corporations must comply with more regulations and tax requirements than a sole proprietorship or a partnership.

This is because owners tend to be protected from liability if the business fails. Liability is placed on the business entity, and not the person.

Also, corporations take part in corporate tax credits. Sole proprietorships and partnerships don’t receive corporate tax credits. How you file taxes depends on whether you file as a C Corporation or an S Corporation.

These organizations pay taxes at corporate income rates. Shareholders are taxed personally for distributions or dividends from the corporation.

These organizations are pass-through entities treated as sole proprietorships or partnerships. They are not taxed at the corporate level.

PROS: The opportunity to be protected from liability and receive corporate tax credits.

CONS: They are trickier to form than sole proprietorships and partnerships.

A Limited Liability Company (LLC) gives you the flexibility of a partnership and the protection of a corporation.

Like a corporation, an LLC must register a unique business name with your state and acquire all licenses and permits for your business.

Also like a corporation, you must file Articles of Organization with the Secretary of State Office.

An owner’s liability is limited when it comes to business decisions and actions. They are more protected than a sole proprietorship or partnership.

When filing taxes, a business owner must file like a sole proprietor or partnership. Income is passed through as regular income to employees or members. LLCs may select different tax treatment, so it’s good to check with a tax advisor.

PROS: Limited liability for your company. 

CONS: While you get the protection of a corporation, you don’t get the same corporate tax credits. 

In the beginning, you don’t have to go fully into a corporation. You may want to start small with an LLC or a partnership. You can always change later.

Considering the pros and cons above should help. If you should need more assistance consider talking with a legal consultant.

Only you know best what business structure works best for your unique needs. When considering an LLC vs partnership, we hope this helps you choose the one that works the best for you.

If you need more assistance, contact us. We can help you make the big decisions to getting started and on your way to making your dream business a reality.