By: Katelyn J. Dougherty, Esq.

Starting a business is an exciting and rewarding venture. However, choosing the right business structure can be overwhelming. There are different types of business structures to choose from, each with its own advantages and disadvantages. This blog, outlines some differences between a limited liability company (LLC), a partnership, and a corporation, to help you determine which business structure is right for you.

Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid business structure that combines the benefits of a partnership and a corporation. An LLC is a separate legal entity from its owners, which means that the owners are not personally liable for the company’s debts or liabilities. This is similar to the protection provided by a corporation. However, an LLC also offers the flexibility of a partnership, allowing the owners to distribute profits and losses according to their ownership interests, rather than being taxed as a separate entity. This means that LLCs offer pass-through taxation, which allows profits and losses to be reported on the owners’ personal tax returns, rather than paying corporate taxes.

Partnership

A partnership is a business structure in which two or more individuals share ownership of a business. Partnerships can be formed as either general partnerships or limited partnerships. In a general partnership, each partner has equal responsibility for the business’s debts and liabilities. In a limited partnership, one or more partners have limited liability and are not responsible for the business’s debts or liabilities beyond their initial investment. Partnerships also offer pass-through taxation, which means that profits and losses are reported on the partners’ personal tax returns.

Corporation

A corporation is a separate legal entity from its owners, which means that the owners are not personally liable for the company’s debts or liabilities. This protection is known as limited liability. Corporations can be formed as either C corporations or S corporations. C corporations are taxed as a separate entity, and profits are taxed twice, once at the corporate level and again when they are distributed to shareholders as dividends. S corporations, on the other hand, offer pass-through taxation, which means that profits and losses are reported on the shareholders’ personal tax returns.

Some Differences between LLCs, Partnerships, and Corporations

• Liability protection: LLCs and corporations offer limited liability protection to their owners, while partnerships do not. In a partnership, each partner is personally liable for the business’s debts and liabilities.
• Taxation: Partnerships offer pass-through taxation, while LLCs offer pass-through taxation as a disregarded entity or taxed as an S corporation, and corporations can be taxed as a separate entity or offer pass-through taxation as an S corporation.
• Ownership: LLCs, partnerships, and corporations can have multiple owners, but corporations are the only business structure that can issue stock to raise capital.
• Management: LLCs and partnerships are typically managed by their owners, while corporations have a board of directors and officers who manage the company.
• Formalities: LLCs and partnerships are typically less formal than corporations, which have strict record-keeping and reporting requirements.

In conclusion, choosing the right business structure can significantly impact your business’s success. LLCs, partnerships, and corporations each have advantages and disadvantages, and it’s important to consider your business’s needs before making a decision. Consult with a legal or financial professional to determine which structure is right for you.

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Don’t have a business attorney? Get in touch with our team by emailing Info@harbourbusinesslaw.com.

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This Blog was written by Founding Attorney, Katelyn Dougherty.

DISCLAIMER: This blog is for educational purposes only and does not offer nor substitute legal advice. This blog does not establish an attorney-client relationship and is not for advertising or solicitation purposes. Any of the content contained herein shall not be used to make any decision without first consulting an attorney. The hiring of an attorney is an important decision not to be based on advertisements or blogs. Harbour Business Law expressly disclaims any and all liability in regard to any actions, or lack thereof, based on any contents of this blog.