The Law To Know

Free tool · Business Law

LLC, Corporation or Partnership? Which Business Entity?

The main choices are the sole proprietorship, the general partnership, the limited partnership, the LLC, the LLP and the corporation (taxed as a C corporation, or, if it qualifies, as an S corporation). They differ in how far the owners are personally liable, how the profits are taxed, how easily money can be raised, how many formalities are required and how flexibly profits can be shared. An LLC is often chosen by small groups that want liability protection and pass-through taxation with few formalities, while a C corporation is the usual vehicle for venture capital and public offerings. Say what you need to see how each form scores.

Tool · Business Entity Chooser

Best fit on these answers: Limited liability company (LLC).

  1. Limited liability company (LLC) (score 6)

    For: Limits owners’ personal liability for the business’s debts. Profits are taxed once, to the owners, avoiding the corporation tax. Few formalities and flexible management in an operating agreement.

  2. Limited liability partnership (LLP) (score 4)

    For: Limits owners’ personal liability for the business’s debts. Profits are taxed once, to the owners, avoiding the corporation tax.

  3. Limited partnership (score 2)

    For: Limited partners are shielded, but at least one general partner is fully liable. Profits are taxed once, to the owners, avoiding the corporation tax.

  4. S corporation (a corporation with an S election) (score 2)

    For: Limits owners’ personal liability for the business’s debts. Profits are taxed once, to the owners, avoiding the corporation tax.

    Against: Same formalities as a corporation.

  • The choice affects liability, tax, control, the ability to raise money and the paperwork. A lawyer and an accountant should confirm it for your state and your facts.
  • Limited liability does not protect an owner from their own wrongdoing, from personal guarantees they sign or from the veil being pierced if the formalities and finances are not kept up.
  • The tool scores a few common factors. Real choices turn on tax detail (for example the pass-through deduction and self-employment tax), state fees, and the business’s plans.

Scores the common business forms (sole proprietorship, general and limited partnership, LLC, LLP, C and S corporation, nonprofit) against what you say you need: liability protection, taxes, investors, formality, flexibility and the kind of owners. It scores a few common factors only, and real choices turn on tax detail and state law, so it is a learning aid and not a recommendation: talk to a lawyer and an accountant. Invented facts. Runs in your browser; nothing is stored or sent.

How to use it

  1. Say how many owners there are and what taxes you prefer.
  2. Say whether you need liability protection, plan to raise venture capital or have non-US owners.
  3. Say whether you want few formalities, special allocations or passive investors.
  4. Read the ranking, with reasons for and against each form.

Common questions

What is the difference between an LLC and an S corporation?

An LLC is a state-law entity; an S corporation is a tax election for a corporation. An S corporation has limits on the kind and number of shareholders and may have only one class of stock, and must distribute profits in proportion to shares. An LLC is more flexible.

Does an LLC protect me from all liability?

No. It protects owners from the business’s debts and most claims, but not from their own wrongdoing, personal guarantees, or the loss of the protection if the formalities and finances are not kept up.

Which entity do venture capital investors prefer?

Usually a Delaware C corporation, because of its familiar structure, preferred stock and path to an IPO.

Learn the law behind the tool

This tool is part of our Business Law course, with lectures, concept maps, flashcards, interactive exercises and a capstone case. Business Law: Entities and Formation.

More free law tools

General information, simplified, mainly on American law, not legal advice. States and countries differ, and real cases turn on facts that a tool cannot capture.