Business owners should create a business entity such as a partnership or corporation to protect their personal and business interests. Business entities, such as limited liability partnerships, limited liability corporations or corporations, keep the business owner’s personal and business assets separate, and protect a business owner’s personal interests from any business liabilities.

What are the differences?

A partnership is an agreement entered into by two or more persons to carry on a business for a profit. Partnerships are run by the partners. A limited liability partnership creates a barrier between each partner’s personal interests and business interests. Therefore, each partner’s personal assets and income are protected from potential liabilities incurred by the business. Limited liability partnerships are taxed at a single level. This means all profits of the partnership are passed through to its partners and are taxed through each partner’s income tax.

A corporation on the other hand is a separate business entity run by its board of directors. A corporation’s profits are taxed at two levels. A corporation with this tax structure is referred to as a C corporation. This corporation first pays tax on its profit. The corporation then distributes profits to shareholders who pay income tax on those dividends. A corporation, however, may elect to be taxed as a partnership. Such a corporation is commonly referred to as a S corporation.

Many people choose to form a corporation instead of a partnership because a corporation’s profits, unlike a partnership or sole proprietorship, is not subject to self-employment tax. This means only the salaries of the members are subject to self-employment tax and not the corporation’s profits. Additionally, corporations are easier to transfer or sell without disturbing the operation of the corporation, and a corporation does not end upon the death of a partner like a partnership.

A business owner may elect to form a limited liability corporation (LLC) instead of a corporation. A LLC is a hybrid between a corporation and a partnership, retaining the liability protection of a corporation and the taxation of a partnership. Business owners elect to form a LLC because LLCs have fewer formalities than corporations. Corporations must hold regular meetings of the board of directors and shareholders and keep written records of these meetings. LLCs need not hold regular meetings or keep written records. Additionally, an LLC is taxed like a partnership, with the profits being taxed through the members’ income tax. However, an LLC can choose to be taxed like either a S or C corporation.

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