Business Formation
Sole Proprietorship vs LLC vs S Corp vs C Corp: What’s the difference?
A Sole Proprietorship is the most simple business structure requiring the least amount of paperwork to establish. It is essentially an unincorporated business that is owned and operated by the individual who set it up. There is no separation between the owners business and personal assets & obligations. This is the most common set up for individuals that perform contract work such as consultants and personal services providers. If a sole proprietorship has two owners, it would become a general partnership.
An LLC is a Limited Liability Company, which is a type legal entity that offers protection to the owner or owners from personal liability for debts the business may incur. This means that your personal assets are not at risk when certain legal claims are made against the business. LLC’s are popular because they offer similar protection to corporations but are easier to set up and come with less regulatory requirements. Keep in mind that an LLC also provides “pass-through” taxation, which means any business income or losses are passed on to the owner’s person tax returns.
But what’s an LLP then? An LLP or Limited Liability Partnership is a general partnership that provides liability protection but only from the actions of the other partner. Not every state allows for the formation of LLP’s however Texas is one of them.
While an LLC is a business entity established to protect the business owner from liabilities, the S Corporation, also known as a S Corp, is a tax election. Once you have established your corporation, you can elect to file as an S Corp. You must pay yourself a “reasonable compensation” which is subject to standard state and federal payroll. The business owner(s) then only pay taxes on the profit (or loss) that passes through.
A C Corp is a tax election for larger companies with 100+ owners that can live in and outside of the United States. C Corps do pay taxes twice, first in the form of corporate taxes then the individual owners pay income tax on any salary and dividends they receive.
