Limited Partnership, LLC, or Corporation?

New business clients regularly pose the question, “What kind of business is best for me: Limited Partnership (LP), Limited Liability Company (LLC) or Corporation?”  Like any good lawyer, we always say, “It depends.”  There are important similarities and differences between these three types of legal entities.  The right fit for your business is determined by several factors.

Most clients’ primary goal in establishing a business entity is personal Asset Protection, meaning an owner’s personal assets, like your family home, cannot be seized to satisfy a business debt or liability.  Each of the three types of organizations, when properly formed and maintained, provides a business owner liability protection. 

Whether forming an LP, LLC or Corporation in Wyoming, all entities are required to file Articles with the Wyoming Secretary of State to formally establish their business, as well as declaring a Registered Agent.  Every Wyoming entity is thereafter required to file an Annual Report with the Wyoming Secretary of State and pay an annual fee for each entity.  All Secretary of State forms, like the Articles of Incorporation and Annual Reports, are published on the Secretary of State’s website, regardless of what type of entity you declare for your company. 

Now here is where the differences start.  There are really two categories of differences: (1) under Wyoming law, and (2) under federal tax law.  This is often where confusion arises.  What obligations does each entity have under State law and the Federal tax designations?  For example, you can be an LLC under state law, but be taxed as Corporation (C-Corp) under Federal law.

LLC

LLCs work great for a single owner or for many owners.  An LLC requires an Operating Agreement (your business playbook), but doesn’t have to have annual meetings, and the organizational structure can be much looser than a corporation.  LLCs are often the right choice for small start-ups with a solid structure and low maintenance obligations, family businesses, and estate planning tools.

Corporation

A Corporation works great for a single owner, as well, however, a corporation has further requirements such as: Bylaws, maintaining a board of directors, and electing corporate officers (example, president, secretary, treasurer).  Corporations are required to have an annual meeting of the Officers and keep Minutes of annual meetings in the Corporate Records.  For many small businesses, the extra work doesn’t make sense, and if neglected, you risk losing your personal asset protection.

Limited Partnership

Limited Partnerships are best suited for husbands and wives or siblings.  A Limited Partnership does not need a written partnership agreement (to be clear, we would not advise you to go without one) and partnerships don’t have to have partner meetings (although communicating with your partners is good practice). 

            The basic differences on the federal (tax) side has to do with how the entity will be taxed and how owners are paid from the business.  There are three ways a business can be taxed under federal law: (1) a disregarded entity; (2) an S-Corporation; or (3) a C-Corporation. 

The disregarded entity means income or loss of the business is passed through to the owners and reported on a personal tax return (the business sends you a K-1).  The income or loss will be reported on your personal tax return, regardless of whether you distribute any income out of the business. 

The S-Corp is a hybrid of pass through taxation, but also allows owners to be W-2 employees of the business, meaning an owner’s income from the business can be split between distributions (regular income) and wages (a business expense which reduces pass-through income to the owner, but is subject to employment taxes). 

For C-Corporations, there is no pass-through of company profit and loss to the owners.  Instead, the business is taxed on its profits at corporate tax rates.  The business carries its own losses and then owners are taxed on any dividends(distributions) or wages separately.  Federal law determines which federal tax elections your business (regardless of entity type under state law) will be eligible to elect, but in most cases, the decision boil down to how many separate owners there are of the business and how many employees the business has.

So what business type is right for you?  Our trusted legal counsel can help guide you to the right choice for your business. Give the team at Lubnau Law a call today: 307-682-1313.