LLC, LLP, or Corporation? Which type of business entity to choose for startups?

2017-09-15 15:05:00
Renee
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If you want to start your own business,the first thing you might be considering what business entity to choose. LLC, LLP, or corporation? Each type suits a specific situation.


LLP (Limited Liability Partnership)

A partnership is "an arrangement in which two or more individuals share the profits and liabilities of a business venture"1. Once liquidated, its creditors can ask partners' personal property to pay back the debt. This is when a LLP should be considered, if you don't want that happens.


There are two scenarios that personal properties will be liable to the debt,

  1. A partner is voluntary to pay; and
  2. debt is due to partners' tort.


LLC (Limited Liability Company)

LLC is is a business entity that combines characteristics of both a corporation and a partnership.


A LLC doesn't file taxes like a corporation, so it is for small sized entity to reduce taxes. It is flexible like a partnership that each member has equal rights to vote, or hire managers to do it for them. However, its flexibility could also cause chaos for not having a board to control and balance between management and shareholders. Its ownership cannot be transferred, unless all the members have agreed to it. 


Coporation

Corporation has a strong feature in financing. It can go public by selling its shares which can be trade in secondary market. In regards to protect investors' property, indemnification prevents loss or compensates for a loss if it causes them harm or causes a third party to sue them.


The so called disadvantage of registering a corporation is that a company pays taxes and its investors pay taxes too.That is also why a small business always chooses LLC or LLP.


Recently, IT starups tend to choos corporation from the beginning. This is because IT startups don't count on sales. They are more into luring ventures, private equities or investment on shares. With a corporation, it is convenient to do so.


Reference

1. http://www.investopedia.com/terms/p/partnership.asp

2. https://www.zhihu.com/people/kssunflower/activities


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