Small Business Entities

Small Business EntitiesSmall Business Entities

When setting up a small business, there is a multitude of issues that need addressing, and one of these is the legal entity. Small Business Entities, It is important to choose the correct form as this depends on the type of professionals involved in the business, the taxes they are willing to pay, the level of formality within the business structure, and differences in personal liability. This article examines only some of the important details differentiating Corporations, limited liability companies (LLCs), and limited liability partnerships (LLPs).

LLC: Small Business Entities

An LLC is one of the simplest business forms. Small Business Entities, The main differentiating factor of this legal form is that the business owners are not personally responsible for a company’s debts or lawsuits. Therefore, if one of the business owner’s faces a lawsuit with regards to the company, the other owners will not be held liable in court. Moreover, an LLC is not rigid in that the owners themselves can decide how to structure the business and the frequency and makeup of annual meetings. Important to note for an LLC is that the owners only file individual tax returns; therefore, there is no need to file corporate taxes.

LLP: Small Business Entities

An LLP is similar to an LLC in the sense of limited liability and Small Business Entities. The LLP must always be comprised of licensed professionals, and each professional is afforded limited liability protection, meaning the debtor lawsuit of another professional at that firm does not make another professional (not named in the lawsuit) liable. However, as mentioned, an LLP is a partnership between licensed professionals, and in California, this only covers public accountants, lawyers, and architects.

Corporations

On the other hand, a corporation is very different from both an LLC and an LLP. Corporations are much more formal than the aforementioned entities, and when created, the owners must file for incorporation in the state of California. In contrast to LLCs, a corporation cannot choose its own structure; it must hold annual meetings with the board of directors and the shareholders. The method of taxation for corporations depends on the chosen form of a corporation: an S or C corp. S corps have similar pass-through taxation as an LLC, where the owners only file individual tax returns. However, C corps experience two levels of taxation.

1. The profits are filed on the business corporate tax returns.

2. The owner must file the profits again on their own individual tax returns.

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