LLC creation, the first question to ask is this the best entity for my business? If you don’t know which entity to use, the choices are sole proprietor, partnership, limited partnership, corporation (C or S), and limited liability company (LLC).
The sole proprietorship is the most basic business entity for an individual to “set up.” Basically you just start doing business. The business is run under your own social security number, so you will file a schedule C with your 1040 form at the end of the year. Of course you should pay quarterly taxes, but that’s about all it takes. The draw back is that there is no liability protection for a sole proprietor.
The partnership is the next easiest entity to consider. It is used when there are two or more individuals involved in the business. Once again you do not need to set up any forms, you just start doing business. However because more than one person is involved it is a good idea to set up a partnership agreement to setout the terms of the relationship.
Also you should keep accounting records for the business, including any profit or loss “pass through” to the tax returns of the partners. These should be based upon what they are allocated from the partnership profits. Once again, the disadvantage is no liability protection. In fact, there is an increased liability, because each individual partner is personally liable for whatever the other partners do.
Limited partnerships are another entity to consider for certain types of businesses, such as owning, managing or developing property. These entities have liability shielding for the limited partner(s), but not the general partner(s). Profits and losses pass through to the individual limited and general partners. The “distributions” of profits and losses in a limited partnership have to be made on a pro rata basis, based on ownership. They are not too difficult to establish with some of the tools available.
LLC or Limited Liability Company
Creating an LLC or Limited Liability Company is an entity that is a good choice for liability protection, tax advantages and estate management. LLCs are quickly formed, and give you the advantage of being able to distribute profits and losses on need, rather than ownership considerations. There is also the ability to choose how you wish to have the LLC taxed. There are formalities to take care of if you want the advantages of asset protection and tax benefits.
Corporations are entities that will give you an excellent liability shield. It doesn’t matter whether you use a C corporation or an S corporation, the liability protection is the same. In fact, basically the same laws are used in LLC liability shielding, thus creating LLC shielding that is just as effective as the corporate shielding.
Corporations have unique tax structures. The primary problem with a C corporation is that you are taxed twice. First, you are taxed at the corporate level and then, you are taxed personally. While the asset protection possibilities of the C and S corporations are the same, the tax structure is very different. Chapter C of the IRS Code defines the “classic” corporate tax structure. The rules in Subchapter S of the IRS Code define a tax structure that is friendlier to a small business owner.
The Subchapter S rules establish a “pass through” structure where the profits or losses are passed through to the 1040 form of each individual owner(s). The laws allow LLCs to establish themselves as either a C corporation or an S corporation and create LLC tax structures identical to the corporate tax structures.
Understanding the available entities will help ensure that you pick the best entity for your small business. If you are still in a quandary, the best entity is usually the LLC. It is easy to form and you can pick your taxing structure.