2014 March 18 by Andrew Savard
When a person starts a business, they often do not consider what happens if the business fails. For many business owners, the idea of starting a new business is a life-long dream that finally takes shape as they embark on this new venture. For some, they see and hear a tremendous amount of information about C Corporations, S Corporations and LLC’s. Everyone they speak with has an opinion about which type of entity is best. But what are the actual differences? What are the advantages of one entity versus another? Can a prospective business owner actually choose the wrong entity?
As a business owner, it is imperative that one protects his or her personal assets from the reach of business creditors. This should be one of the primary considerations when selecting a business entity that is appropriate for a business owner. That being said, there are often multiple types of business entities that will work equally as well for liability protection. To help differentiate the types of business entities, we have written a few brief summaries:
C Corporation: A C Corporation is a business entity that provides liability protection to the shareholders of the corporation. This type of corporation is taxed both on the income made at the corporate and shareholder level.
S Corporation: An S Corporation is a business entity that affords a liability buffer and provides “pass-through taxation”- which means that the income of the business passes through to the owner/investor of the company. There are also numerous and strict rules about who can be the owner of an S corp.
LLC: The LLC is analogous to the corporation in that it provides liability protection and pass-through taxation for the business owner. The LLC however provides more flexibility in the set-up and maintenance of the entity.
Partnership: A partnership is basically an agreement between two or more individuals or entities with a common purpose and an agreement to share profits and losses and management responsibilities. The general partnership however does not afford the partner with any liability protection.
The choice of business entity is not one that should be taken lightly. It is important to consult with an attorney and a CPA or tax advisor as there are both legal and tax implications for creating and operating each particular type of business entities.