Business Formation—Understanding Legal Structures (Part 2)

By Hampton & Pigott
Posted on 5-4-2021

In the first edition of this series about legal entity types, we discussed sole proprietorships, general partnerships, and limited partnerships. Let’s continue our article series with a discussion on LLCs, C Corporations, and S Corporations.

A Limited Shield: The Limited Liability Corporation

If you've ever taken a close look at the businesses around you, you've probably noticed an awful lot of LLCs. These limited liability corporations are incredibly popular because they do something important - as the name suggests, they limit the liability of the members. This form of corporation is usually seen as a middle ground between a partnership or sole proprietorship and a true corporation, with some of the benefits and drawbacks of both.

LLC's are typically chosen not just for legal liability reasons, but also for tax reasons. Unfortunately, those same benefits do put a limit on who can invest in the company. LLCs also require a formal filing, which means drafting Articles of Incorporation that lay out the business's basic structure.

Creating an Entity: The C Corporation

A C Corporation is a true entity in its own right. Once created, it continues to exist - even the death of the original founders doesn't bring this structure to an end. C Corporations have their own liabilities separate from their founders, hold their own debts, and can even own property. Shares can be bought and sold of these companies to raise capital, which increases the number of voices that can control the corporation but that also allows these corporations to grow quickly. There's a big divide between those who operate the corporation and those who actually own the shares, helping to keep a legal wall between the two.

A Taxable Difference: The S Corporation

The S Corporation is quite a bit like a C Corporation, but it handles taxation differently. While both the entity and the shareholders are taxed in a C Corporation, only the shareholders are taxed in an S Corporation.

S Corporations also differ in terms of who can invest in them. Only one hundred shareholders may hold shares in an S corporation, and who those shareholders may be is limited by the law. This tends to make S Corporations more of a favorite among individual investors, as funds can rarely invest in S Corporations.

Most companies will fit into one of the formats discussed in this and the previous article, but if they don’t then a hybrid entity might be the right choice. Look out for the final article in this series to learn what a hybrid entity is and for a few more tips on how to choose the perfect entity for your circumstance.

By choosing the right business structure you can protect yourself and your business, increase your tax advantages and make running your business easier. Contact an attorney at Hampton & Pigott to help you decide how best to structure your business based on your unique needs.