You are thinking of setting up your own business but are wondering what entity is right for you. With the varied terminology, things can be a little bewildering. What are an LP, an LLC, and a corporation? What are the differences between business entities, and how can you know which entity is right for you and your business? These are complex questions that are important to ponder before you set up your own business. If you have an accountant or attorney, they can help you weigh the disadvantages and advantages of each entity in application to your specific situation. Here, we discuss the basic subtle differences between business entities and give you a starting point to understand them.
Understanding LCs vs. LLCs
LLC is an acronym for a limited liability company, while LC is an acronym for a limited company. The largest difference between LCs and LLCs is terminology. While these two entities have different names, they are essentially similar. Whether your company is classed as an LC or an LLC depends on which state it was formed in; different states may use different terms to refer to the same types of entity. Having both an LC and LLC means that the owner is not liable for the company’s obligations and debts. Incorporating your business as a limited company restricts the liability of your company’s shareholders. Small businesses usually choose to incorporate as limited liability companies. The terms of LCs and LLCs mean that their owners have their assets protected in case the company is sued. An exception is if an owner personally puts up their property as collateral or guarantees a business loan. Otherwise, registering your entity as an LC or LLC means that you shield investors and company members from risk. Registering your entity as an LC or LLC is thus one way to protect your assets.
LCs/LLCs vs. Corporations
The next thing to note is how LCs/LLCs differ from corporations. Here are some of the differences:
- Separate Entity Status: Incorporating a business means that you move from a sole proprietorship to a general partnership. Your entity thus becomes a legal business of its own accord, existing separately from its founders and shareholders. Forming an LC/LLC means that you have created an entity with its own legal existence as well. It is important to note that there is no meaningful difference between LC/LLCs and corporations on this front.
- Formation: Both LC/LLCs and corporations are formed by filing particular information with whichever business entity filing office is called. A company will file the articles of incorporation, while an LLC will file the articles of organization. The first contains more information and can be used to opt out of or alter certain statutory requirements that your entity would have otherwise been subject to. The latter contains less information, with all the necessary provisos found in the opening agreement.
- Limited Liability Protection: While establishing an LC/LLC or incorporating your business is one way to avoid personal liability, you can still be held responsible for a company’s debts through the concept of “piercing the corporate veil”. It is thus important to understand the corporate veil and how to maintain it. Learning these differences, legal terms and other corporate vocabularies is essential in learning how to navigate the business world and market.
