The Difference Between LLCs, Corporations, and Partnerships

There are several business entities to choose from. Which one is right for you? There are key differences between LLCs, Corporations, and Partnerships. The difference range from liability protection to paying or avoid different amount of taxes.

9 out of 10 times, an LLC is the way to go for most small new business or an investment holding entity. Corporations have their usefulness in certain scenerios. 

We recommend focusing on the whether the entity you are picking will improve protection against personal liability and won't result in paying additional taxes.

LLCs and CORPORATIONS

Limited Liability Company

  • Taxes (Pass Through) - By default LLC's receive the same tax treatment as sole proprietors or partnerships, meaning all profits of the business are "passed through" to the owners, who pay regular income tax on those profits. There is no "double taxation" as mentioned below with corporations. Alternatively, you can elect S-Corp taxation, explained more below. You should talk to your CPA about which tax classification is best for you. 
  • Personal Liability Protection - Generally yes. The members/managers of an LLC are generally not personally liable for the company's debts and liabilities.
  • Other Considerations: Easy to form and manage. 
  • Who should use: Almost all new businesses

C-Corporation

  • Taxes (Double Taxation) - A corporation's profits are taxed twice.  In other words, when a corporation makes profits, it pays taxes on those profits at the corporate tax rate.  Whatever is left over is then paid out to the stockholders, who ALSO pay taxes on whatever they receive at their personal income tax rates. This double taxation is a key reason why many small business don't choose this business entity type.
  • Liability Protection: Generally yes. The shareholders and directors of an LLC are generally not personally liable for the company's debts and liabilities.
  • Other Notes: Harder to form; more rigid management/meeting requirements
  • Who should use: Tech start-ups; companies seeking venture capital or heading to public stock offerings (IPOs); high-growth companies who anticipate reinvestment of all profits back into the company's expansion.

**S-Corporation (a Corporation or LLC with S-Corporation tax classification)

  • What is it? - An S-Corporation is simply a tax election that can be made by a qualifying corporation or LLC. An entity classified as an "S-Corporations" for tax purposes is a pass-through tax entity, with the added benefit that you may be able to avoid some self-employment tax or other taxes.
  • Limitations: A corporation or an LLC cannot elect S-Corporation tax status if it has any of the following:
    1. has more than 100 owners
    2. is owned by any individual who is not a U.S. citizen
    3. is owned by another entity (e.g. another LLC, corporation, or partnership)
    4. has more than one class of ownership
  • Consult a CPA! - Electing to be taxed as an S-Corporation is a big decision and is not an easy process. You should speak with a CPA before going this route. It is a good route to take if a CPA recommends it due to tax benefits.

PARTNERSHIPS

Partnerships are the type of entity we avoid and don't typically recommend it. The key problem with partnerships is due to the lack of personal liability protection provided similar to the protection of sole proprietorship.

Here's an overview:

General Partnership

  • Personal Liability Protection: NONE; unlimited personal liability
  • Taxes: Pass-through (no double taxation)
  • Who should use: NOBODY

Limited Partnership

  • Personal Liability Protection: LIMITED; only for limited partners.
  • Taxes: Pass-through (no double taxation)
  • Who should use: ALMOST NOBODY, with the possible exception of private equity and venture capital investment funds, and other alternative finance structures.