Choosing between an LLC vs. Corporations vs Partnerships

LLC vs Corporations vs Partnerships – these are the common things to be compared for those who want to start a business.

Once you have decided to form a business, you will need to determine what type of entity should own and operate the business. Typically, you will choose from among the mentioned 3 types of entities – an LLC vs Corporations vs Partnerships.

Partnerships are the least commonly used entity for a small business.  First, by definition, they require a partner, and thus will not even be applicable to businesses owned by one person.  Second, every partnership will require at least one person to serve as a “general partner”, and thereby bear unlimited liability for the partnership’s activities.  It is generally not advisable for any person to assume such a “general partner” exposure to liability.

Corporations have been the traditional entity for a small business.  Corporations are known to provide limited liability, meaning that the liability exposure of the business owner for the corporation’s activities is generally limited to the capital contributions made by the business owner to the corporation.  While both the corporation and the business owner can be subject to adverse “double taxation”, these negative tax consequences can be minimized if the corporation files Form 2553 with the Internal Revenue Service to be treated as an “S Corporation” for income tax purposes.

Limited liability companies (LLCs) are the new popular entity for a small business.  First authorized in Wyoming in 1977 and in most other states in the 1990s, LLCs offer more expansive protection from liability for the business owner than do corporations, as LLCs both provide analogous limited liability protection as described above for a corporation and, in addition, better protection from a creditor lining on ownership interests in the LLC than in the corporation.  Similar to “S Corporations”, LLCs are not subject to adverse “double taxation”, and with more flexibility on who can be an owner of an LLC and how the LLC can be structured than an “S Corporation”.

While LLCs will often be the best choice of entity for most small businesses, the issue of choice of entity should be analyzed based on the specific applicable facts and circumstances in each situation by a qualified attorney.