Business Law Frequently Asked Questions
What is the difference between a Partnership and a Limited Partnership?
Limited Partnerships involve at least one general partner personally liable for the company and responsible for its debts. Limited partners are usually passive investors. They are only liable for the amount of their investment in the business, but may receive bonuses, dividends, profit-sharing or other payments.
What is a Subchapter C Corporation?
Subchapter C Corporations include most large, publicly held businesses. Shareholders are protected from most corporate debts and liabilities. Profits are distributed to shareholders as dividends, and therefore are subject to double taxation. C Corporations must pay business income taxes, and shareholders must pay personal income taxes on dividends.
How does a Subchapter C Corporation compare to a Subchapter S Corporation?
Subchapter S Corporations allow small businesses to insulate shareholders from many corporate debts and liabilities. However, S corporations are limited to seventy-five shareholders and only shareholders who are U.S. citizens or residents. The other most important difference is that profits pass directly to shareholders without any business income taxes, avoiding double taxation.
Which is the best ownership structure if I want personal liability protection?
In large part, the best ownership structure for your business depends on the type of services or products it will provide. If your business will engage in risky activities, you’ll almost surely want to obtain liability insurance and form a business entity that provides personal liability protection, which shields your personal assets from business debts and claims. This means setting up a corporation or a limited liability company (LLC).
Which is the best ownership structure when it comes to taxes?
When it comes to taxes, partnerships and LLCs come out about even. These two business types are “pass-through” tax entities, which means that all of the profits and losses pass through the business to the owners, who report their share of the profits (or deduct their share of the losses) on their personal income tax returns. Therefore, partners and LLC owners can count on about the same amount of tax complexity, paperwork and costs. One thing to bear in mind is that owners of these unincorporated businesses pay income taxes on all net profits of the business, regardless of how much they actually take out of the business each year. Even if all of the profits are kept in the business checking account to meet upcoming business expenses, the owners must report their share of these profits as income on their tax returns.
Can I avoid double taxation if I operate as a Subchapter C Corporation?
To avoid two-tiered corporate taxation, you may want to consider electing S corporation status. An S corporation lets you enjoy the limited liability of a corporate shareholder but pay taxes on the same basis as partnership or LLC. In a regular corporation (also known as a C corporation), the company itself is taxed on business profits and the owners pay individual income tax only on money they draw from the corporation as salary, bonuses and dividends. By contrast, in an S corporation, all business profits “pass-through” to the owners, who report them on their personal tax returns.