In Part I, we described four types of business structures: informally structured sole proprietorships and general partnerships, and two common corporate entities (S Corporations and C Corporations) that provide their owners and managers with limited liability.
Aside from “S” or “C” corporations, what other business entities offer limited liability?
The main alternatives to corporate business structures are the limited liability company (LLC), the limited partnership (LP), and the limited liability partnership (LLP).
- A limited liability company (LLC) offers the limited liability of a corporation and the pass through tax treatment of a sole proprietorship or general partnership. Members of an LCC are usually not personally responsible for the debts of the LLC — they may be liable, however, if they personally guaranteed a loan to the LLC or if they personally caused harm to the LLC or to a third party.
- A general partner of a limited partnership (LP) plays an active role in the company, usually by controlling its operations. As in a general partnership, an LP’s general partner reports and pays taxes (including self-employment taxes) on their profits, and is personally liable for the business’ obligations. An LP’s limited partners do not play an active role in the business – they have little or no control over the business, generally only contribute financially, and have limited personal liability. They individually report and pay taxes on their share of the LP’s yearly profits. A limited partnership must have at least one general partner.
- All of the owners of a limited liability partnership (LLP), on the other hand, have limited personal liability. For this reason, LLPs are favorites of professional groups, including lawyers and accountants, who don’t wish to be held personally liable for their partners’ mistakes. Other options for professional groups include the professional limited liability company (PLLC) and the professional corporation (PC). The PLLC and PC are popular in states like California where professionals that provide services requiring licensing, certification or registration are not permitted to form an LLC.
Do these entities provide tax benefits under the new Tax Law?
New Internal Revenue Code Section 199A provides pass-through entities (including sole proprietors, S Corporations, LLCs and partnerships) with a 20% deduction off their qualifying business income from 2018 through 2025. Note that this tax benefit phases out for certain taxpayers who earn over a certain amount.
In our next post, we will review the initial paperwork required to establish a formal business entity.