This is the second part of a two-part blog posting on business entity forms. In Part One, I discuss sole proprietorships and general partnerships. In this Part Two, I discuss corporations and limited liability companies.
The advantage that corporations and LLCs offer over sole proprietorships and general partnerships is limited liability.
Corporations
C Corporation. Corporations have the most formalities of the business entity forms. They require an annual meeting, adoption of bylaws, election of directors, and adoption of resolutions to approve major corporate actions. Failure to adhere to these formalities can lead to the piercing of the corporate veil.
Corporations are subject to taxation at two levels. At the first level, the corporation itself must pay federal and state taxes. At the second level, corporate shareholders are taxed on distributions they receive from the corporation. Partnerships and most LLCs are treated as pass-through entities for income tax purposes so the partnership or LLC itself pays no tax on revenue. Instead, each partner/member is allocated a portion of the company’s income to report on their personal income tax return.
An S Corporation is a corporation that has made an election with the IRS for flow-through taxation treatment so that it is taxed like a partnership. There are limits on the number and type of shareholders an S Corporation may have. In all other respects, the S Corporation is just like the C Corporation.
A Professional Corporation is a corporation specifically for professionals such as doctors, attorneys, and accountants.
A Statutory Close Corporation lifts many of the formalities (board of directors, annual meeting, etc.) of the corporation.
Forming a Nonprofit Corporation is one of the first steps towards becoming a tax-exempt organization. Nonprofit corporations do not distribute any income to its members, directors, or officers. However, it can compensate such persons for services rendered and it can have paid employees. Nonprofit corporations typically engage in activities related to education, religion, trade, and charities.
Limited Liability Companies
A Limited Liability Company combines the pass-through tax treatment of a partnership with the limited liability of a corporation. Use of S Corporations and limited partnerships has declined in favor of limited liability companies.
A Professional Limited Liability Company (“PLLC”) is an LLC for professionals such as doctors, attorneys, and accountants.
A Series Limited Liability Company is a limited liability company with separate membership series. You can place different assets in each series. In that way, you can insulate the risks of one group of assets from another group of assets without incurring the expense of organizing a separate entity for each business venture. From a practical standpoint, all the intended advantages of a Series LLC may not always be available. I discuss the advantages of Series LLC in a recent posting.