Starting a Business: Inc v LLC

IRS building on Constitution Avenue in Washing...

IRS building on Constitution Avenue in Washington, D.C.. (Photo credit: Wikipedia)

PC, PA, LLC, LLP, Inc, LLLP, huh? There are so many acronyms and they’re thrown around all willy-nilly. What’s an aspiring entrepreneur to do?

So, here’s the thing. Each of these denotes a form of business, how a business is structured and who the “owner” is. Each is also relates to two special topics: (1) taxes and (2) liability.

I’m not an accountant nor a tax attorney, so I’m not going to give too much advice on taxes, but I’ll give you some basics. I’ll spend most of this post on the liability question. But first, the tax basics…

Generally speaking (and almost universally before 1987), if you formed a corporation (think companies like IBM, Inc., Coca-Cola, Inc., etc) the profits of the corporation were taxed as income to the corporation AND they were taxed again as income to the individuals that owned the company – the so-called double tax problem. However, in the last 20-30+ years the IRS has allowed the profits for certain kinds of companies to be taxed only once – when the owners claim it as income. Who wants to get taxed twice? Or even once, if we can avoid it? Get with your accountant or tax attorney for the details.

So, back to the liability stuff. One of the main reasons someone creates a corporation is to establish a liability shield between the business and themselves. Example: a customer gets hurt by your product. They sue the company. If you’re a sole proprietorship (i.e. no corporation), they can take everything the company owns AND everything you personally own. If you’re a corporation (and follow certain rules), they can take everything the company owns but they CAN’T get to you personally. That’s big. Limiting liability encourages business owners to take risks and drive the economy without being terrified that they’ll lose everything they’ve ever had or will ever have.

All those acronyms at the beginning identify the type or corporate structure, how it’s used, and what you can expect liability-wise.

To figure out which acronym (and, therefore which business form) is right for you, contact your business attorney. Or stay tuned here.

In the meantime, check out our website at www.jslawcenter.com

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