The USA is among the top business destinations in the world, due to its competitiveness, creativity, and ease of doing business. It also helps that it encourages free enterprise, rivalry, and economic expansion, according to a Bolder Group blog. It also has different business structures that suit the needs and goals of entrepreneurs across the country. Some of the most common legal entities in the USA are sole proprietorship, limited liability company, limited liability partnership, general partnership, and corporation. In this article, we break down the differences between LLC, LLP, and corporation, so you can decide if one of these is the best for you.
What is an LLC?
A limited liability company is a business structure in the US that offers the benefits of sole proprietorship in terms of the simplicity of operations and pass-through tax relief of a limited liability partnership. Any entity or individual can be an LLC member, including foreign nationals. In most states, LLCs are required to pay annual taxes.
| Pros | Cons |
|---|---|
| LLC can be formed by just one individual. | It is much more expensive to form than sole proprietorship and general partnership. |
| The member or members have limited liability, and therefore, their personal assets are protected in case of legal problems or bankruptcy. | LLCs are required to pay annual franchise taxes. |
| The LLC is not required to have a board of directors, so management and operations are flexible. | Members who work for the LLC are charged for social security and healthcare taxes. In the long run, this would be an additional expense for the members. |
| Profit-sharing among members is flexible. | Less appealing to investors compared to corporations. |
| In some states, like Delaware, LLC has many taxation options. | Because LLCs don’t have stocks, ownership transfer may be more complicated. |
What is LLP?
A Limited Liability Partnership or LLP is a business structure that allows to spread the risks and distribute duties among partners who are normally experienced in different fields. Based on the name itself, partners have limited liability in the partnership, which means their personal assets are protected from any legal risks or concerns that may arise.
| Pros | Cons |
|---|---|
| Partners have limited liability when the partnership is involved in litigations or other legal issues. | There should be at least two partners to form an LLP. Otherwise, it will be dissolved. |
| Partners can benefit from pass-through taxation. | In some states, LLPs are required to file annual reports. Public disclosure of partner information, such as financial statements, may also be a disadvantage. |
| The partnership can accept corporate entities as partners. | Some states have restrictions on forming LLPs. In New York, for example, only select professionals like lawyers and accountants can form LLPs. |
| The partnership can benefit from the expertise of each member and their existing pool of clients or resources. | The partnership may easily be terminated if a partner (or more) withdraws. |
What is a corporation?
In the US, a corporation is a business structure that is distinct from its owners but can be considered a ‘legal person’. Like individuals, a corporation is eligible to enter into contracts or agreements. The owners or shareholders of the corporation earn profits through dividends or stocks but have limited liabilities for the corporation’s legal issues or debts, if any. Many big businesses operate as corporations, such as eBay, Microsoft, Google, Walmart, and Toyota, among others.
| Pros | Cons |
|---|---|
| Shareholders have personal liability protection. | Corporations may be subject to double taxation. |
| It is appealing to investors and may easily attract capital. Corporations can be publicly traded. | Incorporating a corporation may be a costly and lengthy process due to extensive paperwork. |
| As stocks and shares of a corporation can easily be sold, transfer of ownership is fairly straightforward. | There may be a lot of formalities and bureaucracy in corporations due to the existence of bylaws, protocols, board of directors, etc. |
| There are different types of corporations to choose from, based on their tax structure. | Corporations pay high state annual or franchise taxes. |
LLC, LLP, corporation: an overview of differences
| LLC | LLP | Corporation | |
|---|---|---|---|
| Number of owners | One or more persons | Two or more persons | One or more; for s-corp, no more than 100 |
| Foreign ownership | Yes | Yes | Yes; for s-corp, all should be US citizens |
| Board of directors | Not required, but depends on members’ decision | Not required, but depends on the partners’ decision | Required |
| Taxation structure | Pass-through taxation; other options depend on state tax laws | Pass-through taxation | Corporate tax; shareholder taxes for shareholders who work for the company; personal income tax from owner dividends; |
| Annual reports | Not required in some states | Required | Required |
| Availability in states | All states | All states; some states limit LLPs to certain professions | All states |
| Profit distribution | Member profits based on ownership percentage or agreed-upon special allocation | Depends on the partnership agreement; if the agreement is silent, profits are split equally | Distributed via dividends or reinvested by the corporation |
| Member/owner information disclosure to FinCEN | Yes | Yes | Yes |
| Publicly traded | No, but can explore publicly traded partnership | No | Yes on the stock market; yes privately |
| Liability | Limited | Limited | Limited |
| EIN | Yes | Yes | Yes |
What to choose?
Are you interested in entering the US market through a business in Delaware or Florida? It is crucial that you choose the best business structure that will suit your needs – financially, legally, and tax-wise. To do that, you should know the differences between LLC, LLP, corporation, and other available legal entities in the country. Bolder Launch can give you personalized advice on how to penetrate the American market through the appropriate legal entity. Contact us for a free consultation.
This guide is part of Company Formation in our Launch Guide.
