Business Formation

Partnership

It is simplest business structure owned by two or more people together. There are four types of partnerships: General partnership, Limited partnership, Limited liability partnership and Limited liability limited partnership. Not all states recognized all four types of partnership, please consult with us for your business formation.

General Partner: The General Partner takes responsivities in making decisions and managing company. The general partner is personal liable for the all business liability, includes the debts and the action of other company’s partners.

Limited Partner: The limited partner does not take decision rather only invest initial money for financial return. Generally, the limited partners are only liable for money they invested.

Type 1: General Partnership

This is the easiest form of partnership. You do not have to form a business entity, instead, partners can form their business by signing a partnership agreement. All partners have independent control over how to operate business and each partner is personal liable for all business liabilities.

Type 2: Limited Partnership

In Limited Partnership, there is at least one general partner with unlimited liability and fully in charge of business, and one and more partners with limited liability that do not actively manage the business with limited liability.

Type 3: Limited Liability Partnership

A Limited Liability Partnership operates like General Partnership. Each partner actively manage business but limited to its own actions. Each partner still liable for business all debts and liabilities, but do not take responsibility for other partners’ wrongdoing. This form is usually suitable for professional firms like lawyers, doctors, accountants.

Type 4: Limited liability limited partnership

A Limited liability limited partnership operates like Limited Partnership with at least one general partner and one limited partner. The difference is this form limits general partners’ liability, therefore, all partners enjoy liability protections.

Corporation

C-Corp

The corporation, sometimes called a C-Corp is a business entity that is separate from its owner. Corporations can be taxed, make profit, and are legally held liable. Though the corporations give the strongest protection to its owner from personal liability but cost in terms of extensive record-keeping, operational processes, and reporting is higher than other business structures. Unlike sole proprietorships and partnerships, the corporations pay income taxes on their profits. Sometimes the corporations pay taxes two times, first when the company makes profit, secondly when the profit is divided and is paid to shareholders then they must file their personal tax returns. Corporations are preferable when it comes to raising capital as they can raise money through the sale of stock.

Corporations are also good option for the medium or higher risk businesses, and the business that need to be public and to raise money.

S-Corp

The S corporation, which is also called S-Corp, designed to avoid the double taxation drawback of C corps. The S-Corp makes possible the profits and losses to be passed directly to the owner’s personal income without ever being subject to corporate tax rates. All states do not tax the S-Corp equally. Mostly recognize them the same way as federal government does and taxes the shareholders accordingly. Some of the state tax the S-Corp on the profit above from a certain limit.

The S-Corp must file with the IRS to get a proper status. Filing with IRS is different from registering with the state. The qualification for S Corp needs following requirements:

• Be a domestic corporation
• Have only allowable shareholders
• May be individuals, certain trusts, and estates and
• May not be partnerships, corporations or non-resident alien shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Source: IRS

S-Corp has certain limits like it cannot have more than hundred shareholders, and those shareholders must be U.S. citizens.  S corps are also independent like C-Corp. If the shareholder leaves the company or sell his shares, the S-Corp continue doing business undisturbed.  The S-Corp is business that would otherwise be a C-Corp, but the criteria filed as an S corp.

Limited Liability Company (LLC)

The LLC is a very popular business structure and take advantage of both corporation and partnership business structures. In most cases LLC protects you from personal liability like your vehicle, house and saving accounts.

Advantages of LLCs

• Personal Liabilities Protection: Each member is not personal liable for business debts and liability unless some loans with personal guarantee.
• Fewer Corporate Formalities: Unlike corporations the LLC does not hold meetings on regular basis that reduces the risk of complications of documentation and paperwork.
• No Ownership Restrictions:As in S-Corp cannot be more than one hundred stock holders and required all of them should be resident alien of U.S. However, LLC does not have such restrictions.
• Ability to Use the Cash Method of Accounting: Most of the LLC can cash method of accounting that means the income is not earned until it is received to the Limited Liability Company.
• Ability to Place Membership Interests in A Living Trust:The LLC can use living trust as its member, but it is not easy for S-Corp to do the same.
• Tax flexibility: The LLC is considered as a pass-through entity for tax purposes and it have choice of being taxed as LLC or partnership or Corporation.

Disadvantages of LLCs

• Profits Subject to Social Security and Medicare Taxes: In some cases, the owner of LLC pays more taxes than the owner of a corporations (C-Corp or S-Corp). Wages and profit amount of LLC members must pay self-employment tax, presently equal to a 15.3%. In Corporation, only wages not profits are subjected to FICA.
• Owners Must Immediately Recognize Profits: The C Corp does not have to distribute the profit immediately to its shareholder. That means the shareholder are not always taxed on corporation’s profit in C Corp. As anLLC does not pay double-tax, but the profits of the of LLC are immediately recognized on k-1 and pass through to individual tax return.
• Fewer fringe benefits: The employees of LLC who have got fringe benefits like group insurance, medical insurance and medical plans are considered as taxable income. This is same for employees who own more than 2% of an S-corporation. However, employees under C-Corp who do not need to report fringe benefit as taxable income.

Comparisons Of Different Business Entities