LLC or Limited Liability Corporation is a type of company where the assets and liabilities of the owners are separate from the company’s. It is a combination of a corporation and a partnership, combining advantages of both.
An LLC separates the liabilities of the corporation from the owner, thus offering a protection to the owners. It offers legal protection to owners for company’s debt and obligations. In addition, there are certain tax benefits and operational benefits involved with LLC too.
An LLC does not directly pay corporation tax as a normal does. Instead the profit or losses from the operations are shown as income for the individual owners in the same percentage share as their ownership. This then helps the owners to pay lesser tax on the income profits and losses. This is known as pass through taxation (Incorporate).
Also, for setting up an LLC, the legal requirements are lesser as compared to a normal corporation. This makes the operational aspects faster and more convenient, resulting in cost and time savings for the company.
A Limited Liability Partnership or LLP is similar to LLC with the owners being a separate entity than the business itself. To form an LLP, minimum two partners are required. There is some or no limit on the maximum number of partners in an LLP, differing according to different jurisdictions (Investopedia).
Similar to LLC, the feature of being a distinct entity than owners offers protection to owners in terms of obligations and debt of the company. In addition to this, an LLP is easier to form with the cost of registration being low as well.
An additional protection that an LLP offers in comparison to a normal partnership is that the partners are responsible for only their individual decisions and not for the acts of their partners. There are significantly lesser disclosures that have to be made to the regulator and this reduces the amount and time spent for public disclosures.
But there is a disadvantage for an LLP that it cannot come out with an IPO to raise funds from public at large. This can hinder the growth plan of the company significantly.
C Corporation is one of the most common type of companies being formed in US. It distinguishes the owners from the business, thus limiting the liabilities of the owners. This feature is similar to that of LLCs and LLPs.
In addition to this, the company stays in existence in perpetuity even if one or more of the partners have left the company. This is very important for a company as the cost and effort for successfully establishing a renowned company would be saved in such a circumstance (Incorporate).
Similar to LLP, there is no limit on the maximum number of shareholders for a C Corporation. C Corporations can access market for IPOs or through other capital raising ways easily. But there is a disadvantage as well related to taxation.
The company has to pay taxes on the profit it has earned and then has to pay dividend tax when distributing such profits to the shareholders. This phenomenon is called double taxation and can severely limit the company’s ability to distribute profits.
Also, the shareholders cannot use corporate losses to deduct their taxable income, as is the case for LLC and LLP.
As can be seen from the brief description of the above three types of companies, they have both similarities and distinctions in various aspects, thus making each of them more attractive than the rest for different circumstances.
The option to form an LLC is not available in all states. Wherever this option is available, this type of company should be formed when an owner or a set of owners desire flexibility in management and profit sharing. Also, when a small business anticipates that there might be losses during initial years of operations, they would prefer to go for an LLC (BizFilings).
Further, as the accounting standards for an LLC are pretty lax, with no need for accrual accounting, small companies may prefer this type of incorporation. Management flexibility may also attract new businesses which do not want significant expenditure on management and governance.
An LLP is generally formed when the number of owners are expected to be limited. This can be a start-up or a small business started by owners known to each other and serving a limited area in near future.
But is should be the form of incorporation for a company which plans to go for an IPO. An LLP cannot raise funds through IPO. So a small business with limited number of partners and which expects to remain a private company may use this type of incorporation.
A C Corporation is the most widely used form of incorporation. Any company, which plans to expand business in the future while at the same time protecting owners from legal liabilities from the obligations of the business, may form a C Corporation (BizFilings).
Also, the companies which plan to go public through IPO and raise funds from various sources may incorporate as a C Corporation. Further, this incorporation type provides options of shareholders leaving at any time and also offers flexibility in terms of employee remuneration and benefits.
We have seen that all three types of companies have similarities in terms of protection of shareholders or owners from the obligations of the company, there are differences with respect to operational and managerial aspects, which must be kept in mind while incorporating a business.
References
Incorporate. Limited Liability Company (LLC). Retrieved from https://www.incorporate.com/limited_liability_company.html.
Investopedia. Limited Liability Partnership (LLP): The Basics. Retrieved from http://www.investopedia.com/articles/investing/090214/limited-liability-partnership-llp-basics.asp.
Incorporate. Advantages of Starting a C Corporation. Retrieved from https://www.incorporate.com/c_corporation.html.
BizFilings. Which Business Type is Right for Me – C Corp, S Corp or LLC? Retrieved from http://www.bizfilings.com/learn/compare-business-types.aspx.
