Have you ever wondered what those letters and abbreviations you see behind business names stand for? They are business formations meaning they help define the nature, taxation, and overall financial structure of a company. If you are planning to open your own business, you will need to define it as an L.L.C., L.L.P, or Inc. Today’s post will help to define the differences between the three main types of business formations.
L.L.C. – Limited Liability Company
An LLC is a company that blends parts of a partnership and corporation structure. LLCs combine the liability nature of a corporation and the taxation structure of a partnership company. LLCs have less corporate regulations like a Board of Directors or necessary shareholders meetings. LLCs also have fewer ownership restrictions and have more choice in deciding a tax structure. LLC and LLPs are considered “pass through” tax entities, meaning that taxation is levied through the income tax of the owners as their profits are considered the income of the individuals. LLCs, like corporations, allow the benefit of separating the proprietor’s personal and business assets. This means that any personal assets not invested in the LLC will not be at risk of loss in case of bankruptcy.
L.L.P. – Limited Liability Partnership
An LLP and an LLC are very similar in that they blend elements of both corporations and partnerships, but they contain differences. In a LLP, there is liability protection of a member against the actions of another member. You cannot receive this benefit in an LLC. This is particularly significant in instances that require legal actions. In an LLP, only the one presented in the suit is responsible, not the other members. Also, dependent on the state, only certain individuals are allowed to form LLCs. Almost any person can be granted permission to form an LLC, but for some states, LLPs can only be formed by licensed professionals and must have a minimum of two partners.
Inc. – Corporation
The Inc. abbreviation is short for “Incorporated,” meaning that the company is a corporation business. A corporation requires state approval as well as a business charter or certification of incorporation and all fees due to be paid. A corporation is a business that exists completely separate from those that own it. Profits, losses and taxes are paid through the corporation not the tax returns of the owners.
What Should You Do?
Selecting the right business structure of your company will be key to your taxation formation, your legal liability, and your strategy for business expansion. When you begin doing your research, reach out and ask questions. For example, many small business owners in Louisiana ask questions such as can your business be connected to your Metairie personal banking account or should you form a separate account? What type of employee benefits do you need to offer depending on the business formation? Before you invest or decide to create your company, look into these different types of business formations as well as others so that you can stay protected and efficient.
This guest post was written by Flynn Zaiger in association with Hibernia Bank. The views expressed herein are those of the author and not necessarily those of any financial institution or bank. This article is intended to provide those reading it with information about matters of current interest. It should not be construed as legal or financial advice concerning a specific topic and should not be acted upon without contacting the appropriate professional.