LLC Corporations: Your Best Choice?

There are many options for your business, including forming a corporation, a partnership, or an LLC corporation (limited liability corporation). Following is a quick review of the major options.

1. Sole Proprietorship

This is the most common form of ownership. It requires the least paperwork, at least in the beginning.

Many small businesspeople start out this way, and form corporations or llc's later, as circumstances dictate. That is a very valid approach.

For taxing purposes, a sole proprietor fills out a Schedule C for his federal tax return detailing the income and expenses of the company. Any profit that remains is taxed at a personal tax rate; any loss is part of the deduction for the whole tax return. For smaller companies, this is a very straightforward way of doing it. It works best when there is a loss, or little profit.

Also, if a business owner wants more legal insulation, it is often wise to look to other types of business formation.

2. Partnership

A simple partnership is a like a sole proprietor except now two or more people are involved. Each partner completely responsible for liabilities of the partnership, and each partner's personal assets are available to creditors of the business.

Husbands and wives often form business as simple partners. Again, as long as the business is small, this is a viable option. When it grows, or when a potential liability exists, it is a good idea to look to other forms of business organization

There are many more complex partnerships possible. Partnership agreements can be devised for nearly every situation. The partnership agreement can specify who makes decisions, and how profits are distributed. There is even a form of partnership called a "limited liability partnership", which places the general partner as the sole entity liable for any debt, and places the general partners as simply investors.

3. C Corporation

A C Corporation is the most common entity for public companies.

With a C corporation, the corporation itself becomes a "person" and has its own tax rate, which is often lower than individual tax rates. There is often more paperwork involved with a C Corporation than with a sole proprietorship, such as maintaining minutes and corporate documents. A corporation can be owned by one person, or by thousands. Each owner receives a specified number of shares.

If there is a sole owner of a corporation, that owner will be expected to co-sign for all notes, debts and liabilities. In large corporation, that isn't so.

4. Limited Liability Company (LLC)

The LLC is one of the fastest growing forms of incorporation by small business, mostly due to its reduced paperwork. An LLC may be owned by one person, or by many.

By adding members to your LLC, you can get the same profit-sharing characteristics of a partnership without being personally liable for a partner's actions. As with other partnerships, the operating agreement is very flexible in terms of specifying who makes decisions, and how the profits are allocated.

Finding your perfect business organization is not easy. There are a lot of tax considerations and liability considerations. It is often well worthwhile to spend an hour or so with an attorney to devise the best approach for your business.