S CORP, C CORP, LLC, LP, LLP, GP – what do all these abbreviations mean for you and your business?
With so many options, deciding on the entity structure for your business can be mind boggling. Deciding which entity is right for your business depends on a variety of factors, including liability for owners, taxation, control over business decisions and ability to transfer ownership. When thinking about the best entity for your business, it pays to consult legal counsel and tax advisors to help you determine the pros and cons of the various entity structures.
A brief discussion of various entities follows below, to give you a taste of various entity options:
S CORP and C CORP: Owners of corporations are shareholders and their liability is generally limited to their investments in the corporation. The earnings of a corporation are taxed at the corporate level, and again when the earnings are distributed to shareholders as dividends. If certain IRS requirements are met, small corporations can elect S Corporation status and choose to be taxed as a partnership. A corporation owned by a single shareholder can also choose to be treated as a disregarded entity for tax purposes and be taxed as a sole proprietor. To create and maintain a corporation requires preparing and filing Articles of Incorporation, drafting by-laws, and drafting resolutions and corporate minutes. Annual shareholder meetings are generally held to elect the board of directors.
LLC: Members of limited liability companies receive limited liability and can draft an operating agreement to fit the specific needs of their members. An LLC can be owned by one person, and a one member LLC can elect to be taxed as either a corporation or a disregarded entity, which is taxed as a sole proprietor. LLCs with multiple members can be taxed as a partnership or a corporation and can elect S Corp status. Startup costs include filing fees and drafting the operating agreement and related documents.
GP: General Partnerships are created when two or more people conduct a for-profit business. A partnership agreement should be drafted to confirm how profits and losses will be shared among the partners. The partners of a general partnership have unlimited liability, which puts the partners’ personal assets at risk for partnership debts, contracts and legal actions. Partnerships are pass-through entities for tax purposes, so the gains and losses from the partnership pass through to the personal tax returns of the partners.
LP: Limited partnerships are similar to general partnerships in that general partners are still subject to unlimited personal liability; however, LPs allow limited partners to invest in the partnership with their liability limited to the limited partner’s investment in the partnership. In exchange for limited liability, the limited partner is not able to actively manage the partnership.
LLP: Limited liability partnerships were mainly created to protect professional partnerships, such as lawyers, accountants and doctors from liability for negligent acts of their partners. LLPs operate similarly to general partnerships, with the exception that partners will not be liable for the negligence of their partners and will not be liable for partnership debts unless they agree to that liability in writing. LLPs are taxed as partnerships.
Please note that entity filing, and reporting requirements vary from state to state, so we encourage you to review your specific State’s filing and reporting requirements for the various entity options and to consult an accountant regarding the tax implications of various entities before choosing an entity structure for your business.
This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
Wendy M. Reutebuch | Practice Areas: Real Estate, Real Estate Finance and Creditors’ Rights
Wendy represents clients in both Illinois and Wisconsin in a wide variety of commercial real estate and real estate finance transactions. In addition to handling acquisitions, dispositions and leases, Wendy also advises lenders on loan transactions, loan workouts, loan restructurings, forbearance and pre-foreclosure matters. If you need assistance with a related matter, contact Wendy.