Business Law Topics: Limited Liability Companies (LLC)

How do I choose between an S Corporation and a Limited Liability Company?

In general, consider the following guidelines:

  1. If you are the only owner, strongly consider a single member LLC because the entity can be formed by filing a one-page form, there are no corporate formalities and no corporate or partnership tax return is necessary. Your taxes will be filed by Schedule C to your personal form 1040.
  2. If your business looks and acts like a partnership (i.e., a group of consultants), then the LLC may be a good fit because, in its simplest form, it is essentially a partnership. You will file a partnership tax return.

What is a Limited Liability Partnership?

Many people confuse Limited Liability Partnerships with Limited Liability Companies. A Limited Liability Partnership is a special entity that is only for law firms and accounting firms.

What is the difference between an S Corporation and a Limited Liability Company (LLC)?

A subchapter S election with the IRS turns a qualifying corporation (subchapter C Corporation) into a pass-through entity, which means that the corporation pays no federal corporate income tax. Instead, each year, shareholders pay tax on the corporation’s profit. Partnerships are also pass-through entities. The weakness of the partnership entity is that partners share in the businesses liabilities. A Limited Liability Company is a partnership with the limited liability of a corporation.

I plan to start a new venture, but I don’t want to waste money on legal fees if this start-up dies on the vine. When is the right time to incorporate or set up a limited liability company (LLC)?

The main reason for setting up a corporation, S Corporation or limited liability company (LLC) is to protect investors from the company’s liabilities. So, when you are close to accepting investments or entering into contracts on behalf of the company, it is time to establish the company as a legal entity (corporation, S corp. or LLC). Another reason to establish a corporate structure (or limited liability company) is to make the rights of founders and employees clear and to establish a tax basis in founder’s stock.