The various types of business formations can sometimes be confusing and hard to understand. Yet it is vital for those planning on starting or registering a business to know the difference between an LLC, S corporation, and a C corporation, as well as the pros and cons for each. A great place to start is to find out what it really means to have a limited liability company.
What Type of Business Can Be an LLC?
While anyone can register an S or C corporation if they so choose, not every business model can function smoothly within the confines had in a limited liability company registration. The majority of LLCs are one-person companies, such as freelancers, however larger companies, and even some foreign entities operate under this title.
For the self-employed, forming a limited liability company under which to service their customers or clients is a great way to avoid putting their personal finances and lifestyle at risk, as it protects them from business liability. They get to have the financial protection of operating under a corporation, but avoid the complex bookkeeping practices and extensive documentation that C corps, and even S corps have to face.
Enjoy Limited Bookkeeping
When compared to other business types, bookkeeping for a limited liability company is much easier. These companies are not subjected to the harsh, stringent requirements imposed on corporations through the law. For example, there are some states in the US that require corporations to file annual reports, but this is not a requirement for LLCs.
No Need for an Operating Agreement
It’s good for any business to have an operating agreement, but there’s a big difference between maintaining one of these agreements because you have to and having one because you feel it is a smart idea for your business. Although corporations must maintain an operating agreement, limited liability companies do not.
No Business Debt Liability
This business registration type proves attractive to freelancers and other self-employed individuals when trying to decide whether or not they should register. Registering gives them the advantage of being free from having to risk the state of their personal finances for the debts of the business. Should they ever encounter litigation, they might be at risk of losing the business, but their home and personal assets will stay safe.
Pay Self-Employment Taxes
Having to pay self-employment taxes could be seen as one of the disadvantages of having an LLC, but this can also be a benefit. Owners of S or C corps may be subject to double taxation, because they have to pay corporate tax in addition to income tax. In a limited liability company, the tax filings for the business is covered on the owners own personal filing.
An easy way to remember how the limited liability business type differs from others is to think of it as the go-to company registration type for those who work for themselves and have few or no employees.
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