You have your million-dollar business idea, and you’re ready to take the leap into the world of entrepreneurship.
You’ve heard pros and cons about different types of legal business entities, but you aren’t sure what is best for your business. Like any informed soon-to-be business owner, you want to make the best decision for your company to set it up for future success.
Two of the most common types of business entities are Limited Liability Companies and Limited Liability Partnerships. LLCs and LLPs are both good choices, so how do you determine the best fit for your business?
Angela Coy, CPA and partner with Sherman & Armbruster in Greenwood, said it depends on how you want to approach your new company.
LLCs combine factors from a sole proprietorship, partnership and corporation into one legal entity. An LLC’s owners are called members, and each member owns a percentage of the business. Only one member is needed to form an LLC, and there is no maximum number. The percentage each member owns does not have to be the same.
Typically, Coy said, small business owners choose to form an LLC over other options.
LLPs are general partnerships combined with limited liability protection. An LLP’s owners are known as partners, and each member owns a portion of the business. An LLP requires a minimum of two partners.
Bright Ideas for Business is an information sharing program of the following community partners:
How do you envision your company running in the future? Do you want to have the option to own the company but not be active in the day-to-day operations and management?
An LLC provides flexibility in this department. Members can decide to form a partnership-style management and run the company, or they can choose to elect officials to manage the business. Either option will provide the members with the same limited liability protection.
In an LLP, the partners each have equal power to make company decisions.
What happens if something goes wrong? How much personal responsibility would you have?
LLC members’ personal assets are protected from any company debts, such as a business loan for equipment. LLP partners’ do not have the some personal protection. However, in an LLP, each partner is protected from another partner’s negligence or malpractice claims.
Taxes...everyone’s favorite word. LLCs and LLPs report taxes the same way. The IRS doesn’t tax LLCs or LLPs directly. Instead, profits and losses are passed through to their members and partners, respectively.
However, LLCs have the option of electing to report income the same way as a corporation would. By choosing to do this, the LLC would be taxed on business profits and then the partners would be taxed on their profits.
Coy said with LLC’s electing corporate status there are two options:1) C corporation and it pays the tax and 2) S corporation and the members pay the tax.
Thinking to the future, will your business have more than one location and in different states?
Coy said all of the states have their own requirements for LLCs, but LLPs have similar requirements in all states making an LLP easier to manage.
She said to make sure to think about these factors and speak with a professional for guidance when choosing what business entity to select.
“My recommendation is that a choice of entity decision is only made after careful consideration of the goals, obligations, and commitments of the parties to be involved. It is appropriate to seek both legal and accounting advice before making a choice of entity decision,” said Coy.