Choosing a business entity is an important part of setting up a business. The battle today is the LLC vs corporation war. It’s not actually a war, but you’ll sure get different opinions, depending upon which attorney you talk to. One of the biggest mistakes you can make is to just blindly trust your lawyer, CPA, or any other professional.
LLC vs S Corp vs C Corp
Most small businesses will consider using an S corporation over a C corporation. The liability shielding is the same. The only difference is the tax structure. The next question is between the S corp vs LLC, (limited liability company).
The LLC vs S corp question doesn’t hinge on tax structure. The tax structure is identical. Your LLC is simply filing as if it were an S corp. The liability shield in an s corp vs LLC decision is pretty much an non issue, as least as far as the “limited liability” of the owners is concerned.
S Corp vs LLC
When it comes to liability shielding, the S corporation vs LLC shielding is basically identical. However, the LLC does give you “charging order protection” that the corporation can’t give you. In that case, the LLC or S corp decision comes down in favor of the S corp.
The same is true in the LLC vs C corp discussion. The C corp can’t give you the charging order protection. Of course, you could chose to have your LLC taxed as a C corp, but you had better have some really good reasons for choosing to set up a C corp or have an LLC taxed as a C corp. There aren’t many good reasons.
It is very rare that a small business should have a C corp tax structure. You’d better think three times before establishing a C corp structure or electing to have your LLC taxed as a C corp. When it comes to choosing between a LLC vs C corp, I think the choice is clear. Choose the LLC, because the LLC limited liability shield is basically the same, and the LLC offers the charging order protection that the C corp can’t offer.
Less Formalities
In the way of “ease of operation,” the LLC verses S corp discussion leans a little in favor of the LLC. The LLC generally has fewer “formal” operation requirements. For example, the annual meeting you have to have in the corporations isn’t as “critical” for LLCs.
However, you need to establish that the entity (corp or LLC) isn’t your alter ego, so you need to treat it formally, no matter what entity you choose. But, if you’re making the LLC versus S corp decision, know that the LLC is more forgiving if you don’t follow the formalities as strictly.
The Professional LLC vs Inc.
Often professionals have a confusing decision when deciding between an LLC vs Inc. The confusion comes because a professional can’t hide behind the “corporate shield” to protect against malpractice. Professionals include all of the medical, legal, accounting, architecture, engineering, and lots of other fields of work. Professionals can set up a “professional limited liability company” (PLLC).
The PLLC vs LLC question isn’t really an issue. Professionals have to have the PLLC. It will protect them from all the liabilities of operating their business, except their own malpractice. In the LLC vs Inc. arena, the issue is the same for professionals. It has to be a professional designated entity – LLC or corporation.
Limited Liability Partnerships
There is one other entity that is often confused with an LLC. It is the LLP or limited liability partnership. It is a relatively new animal. You professional probably hasn’t addressed the LLP vs LLC issues.
LLP are primarily used in the areas were large partnerships were used in the last century, i.e., lawyers, and accountants. They limited the liability of the individual partners. (In a true partnership each partner is personally liable.) The liability protection is dependent on state law.
Most states have adopted some sort of LLP since the 1996 Partnership Act was passed, but their use is still spotty. When it comes to the LLP vs LLC question, you should probably opt for the LLC.
Conclusion
The LLC is a great way to run a business. If you are vassulating between the LLC vs Inc. choices, the LLC would be the default choice for most small businesses. If most of the income from your business is “earned income,” establish an S corp taxing structure. If most of it is passive income (rents, royalties, etc.) then have your LLC taxed as a Partnership.
