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   LLP, LLC, S-corp and C-corp

           Taken from (Fortune Small Business)

What exactly is an LLP
What is the difference between an LLC and a Corporation
What about S-corps and C-corps
Sorting through the legal jargon and tax codes defining these business structures can be daunting for entrepreneurs - but picking the right structure for your company brings vital tax benefits and legal flexibility.

    LLC or corporation

There's virtually no reason why a small business should file as a corporation, unless the owners plan to take the business public in the near future. 

Instead, filing as an LLC, or limited liability company, is usually the best choice. 

The major differences between an LLC and a corporation include decision-making flexibility and the type of taxation the business faces.

A corporation has to have a board of directors to make decisions according to a formal process.

The "board" could technically be one person, but it still needs to exist.

An LLC, on the other hand, can set up an operating agreement at the time the business is created, and make decisions more informally.

    Common Provisions in Operating Agreements include

• Who can make decisions on behalf of the LLC. Will all owners manage the company, or will there be one primary manager.
• What are the owners' responsibilities to contribute money to the company?
• When and how will the company income be shared?
• What procedure is required to transfer membership interests in the company?

The second major difference is that an LLC benefits from "pass-through taxation."

Pass-through taxation means the company pays no tax on its profits: 

It's like the company doesn't even exist for federal tax purposes.  

In fact, if the LLC is a sole proprietorship, the company does not have to file any tax returns. 

LLCs with more than one member must file a federal tax return, although the LLC itself is not subject to a tax.

Earnings pass through to the owners, who then report the income on their own tax returns and pay the tax on their income.

A corporation, on the other hand, must pay federal taxes as an entity; its shareholders are then taxed on any dividends or distributions they receive from the company, in effect allowing some of the company's profits to be taxed twice.

There is an exception to this rule, however, for companies that file under subchapter S of the Internal Revenue Code. Such companies are commonly referred to as "S-corp" entities.

    S-corp or C-corp

The terms "S-corp" and "C-corp" are merely shorthand references for a company's tax status - they're not distinct business entities.

The major tax difference between the two is that an S-corp receives pass-through tax treatment similar to a partnership or LLC, whereas a C-corp (taxed under subchapter C) is required to pay tax on its income as a business entity.

An S-corp's pass-through tax treatment does not come without some limits, however. An S-corp can have only 100 shareholders, each of whom must be an individual. (Certain types of trusts are also eligible.) Other businesses can't be an S-corp shareholder.

For tax purposes, a small-business owner will probably want to choose either an LLC or an S-corp to obtain pass through tax treatment and to avoid the double taxation of a C-corp.

The shareholders of a corporation can obtain subchapter S treatment by filing Form 2553 with the IRS within 75 days of starting operations.

If this form is not filed, the corporation is taxed under subchapter C by default.

    The Difference between an LLC and S-corp

The members of an LLC can agree to share a company's income and absorb its losses disproportionately, whereas      S-corp shareholders must share in the company's income in direct proportion to the number of shares they hold.

Even if an S-corp is small and private, it's still subject to corporate formalities.

The company will need to hold an annual meeting and file formal reports to its shareholders documenting its decision-making processes on significant corporate matters.

An LLC does not need such documentation.

Between an LLC and an S-corp, the LLC is again the more flexible of the two and can accommodate most business arrangements.

    Partnerships

In addition to an LLC or a corporation, there are two types of partnerships a small business may want to consider: a general partnership and a limited partnership.

The first requirement of any partnership is obvious: there must be more than one owner, or "partners" (hence the name).  If you're a sole proprietor, opt for an LLC instead.

Partnerships, are typically formed by professionals such as lawyers, architects, accountants and doctors.

In some states, such firms are precluded from operating as LLCs; in others, where general partnerships and long standing law firms predated LLC laws, many organizations opt to retain their existing status.

    General Partnership and LLPs

In a general partnership, all owners have equal rights to manage the company, regardless of their ownership shares in the company.

On the downside, they can also all be equally liable for any mishaps the company runs into, like debt or lawsuits.

This is where an LLP, or limited liability partnership, comes into play.

An LLP is merely a certificate a general partnership can obtain to create a liability shield protecting the individual partners, for example, a law firm that has offices in New York and Los Angeles.

If a partner in Los Angeles commits malpractice, the partner in New York will not be considered individually liable. Without an LLP certificate, however, the New York partner would not be protected.

    Limited Partnership and LLLP

A limited partnership structure varies from a general partnership in that not all partners are entitled to participate in managing the business.

The general partner or partners actively manage the business, while the limited partners (usually passive investors) do not participate in the day-to-day operations.

This type of business structure usually suits real-estate investments.

When it comes to liability in a limited partnership, responsibility follows the management chain: in most actions, the limited partner is not liable, but the general partner is.

In many states, however, a limited partnership can obtain an LLLP certificate, for a limited liability limited partnership. This certificate, works in the same manner as the LLP certificate by protecting the general partners with a liability shield.

    An Entrepreneur's best choice

In the end, an LLC business structure is the best bet for most small businesses.

It's the structure that gives the owners the greatest flexibility.

Plus, it automatically includes a liability shield protecting all owners.

    What an LLC Protects You From

An LLC is a good shield. While an LLC (limited liability company), shelters its owners from most personal liability, there are exceptions.

In general, owners of an LLC aren't personally liable for torts, for instance, if you're an owner of a store where someone slips and falls and injures themselves, the business may be liable, but you as an owner aren't liable.

Or if a driver for your company is in an accident, you, personally, are shielded from liability."

LLC's were created, to encourage people to invest in businesses while limiting their liability. 

That's the advantage of an LLC versus a general partnership, you, personally, are immune from liability stemming from the negligence of others.

An example:

if one of your employees spills a drink on a customer's very expensive machine, you don't need to worry about the customer's attorney coming after your house or personal property to recoup expenses.

If you, personally, act negligently, the LLC shield's will not protect you from liability.

Your liability as an owner of an consulting firm is no different than as an owner of another type of business. 

You are still liable for your own actions if they are negligent, the LLC's shield does not extend to your actions if they personally and directly injure someone, or if you intentionally do something fraudulent, illegal or reckless. 

    The Difference between an S-corp and LLC

Should you incorporate as an LLC or an S-corp.

What are the real differences between these two incorporation types.

Are there tax benefits you should be aware of, or common pitfalls.

A limited liability company (LLC) and an S corporation (S-corp) are completely different things, an S-Corp is a misnomer; it's not a form of business,  rather, it's a tax status. S-corp refers to Subchapter S of the IRS code, which says that if a corporation can meet all the requirements, it can be taxed in the same way as a partnership.

Traditionally, a partnership form gave you pass-through taxation, i.e., the opportunity to not be taxed twice, which is what you wanted, partnerships don't pay separate income tax, so they're only taxed once. Today, you can achieve the same sort of thing with an LLC.

Both LLCs and companies with S-corp status provide owners with limited liability protection. S-corp status just says that if you jump through certain hoops, you'll be taxed the same way a partnership is, there are restrictions: for example, you can't have more than 100 shareholders.

If you're an LLC, "there are no hoops to jump through, you can choose how you want to be taxed.

You just say 'I want to be taxed as a partnership.

That way, you enjoy the tax benefits without all the regulations involved in S-corps.

The biggest pitfall may be thinking you need S-corp status when, in fact, you can get all the benefits you're looking for from an LLC.   

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