Frequently Asked Questions about Business Entities

Q: What is the difference between an LP and an LLP?

A: An LP has one general partner who manages the business, but has no limited liability. The rest of the partners in an LP are limited partners, who have limited liability, and do not manage the business. An LLP has all limited partners, but the more active in management of the business a partner is, the more personal risk he/she takes; thus, each partner can determine the amount of limited liability he/she wants in an LLP.

Q: What is the difference between an LLP and an LLC?

A: An LLP is a business owned by partners where participating in management means more personal risk.  An LLC is owned by members, and members can participate in management without risking their personal assets.

Q: What is the difference between an S corporation and a C corporation?

A: An S corporation is a small corporation with shares that are not publicly traded and does not have double taxation for its shareholders.  A C corporation is a big corporation with publicly traded shares with double taxation for its shareholders.

Q: What is the difference between an LC and an LLC?

A: The only difference between an LC and the LLC is in the name.  Each state decides whether to call it an LC or an LLC.

Q: What is “limited liability”?

A: Limited liability means that the company is responsible for paying its own debts, taxes, and judgments, and that the creditors of the business cannot reach the owners’ personal assets.

Q: Why would I want “limited liability”?

A: If your business has limited liability for owners, and it does not have enough money to pay its creditors, then the creditors cannot turn around and try to collect the rest of what they are owed from you.  You can keep your personal assets, even if your business cannot pay its debts.

Q: What is “double taxation”?

A: Because most registered businesses are separate entities from the people who own them, they must pay their own taxes.  Thus, when a C corporation receives profits, it must pay its own income tax.  Then, when it pays its owners from those profits, the owners must pay their own personal income tax.  That means that the same business profit gets taxed twice: once for the corporation, and again for the owners.

Q: What business types do not have “double taxation”?

A: S corporations, LP’s, LLP’s, and LC/LLC’s do not have double taxation.

Q: Why would I want to avoid “double taxation”?

A: When you only have to pay tax on the same profit one time, then you pay less tax and get to keep more of the business’s profit.

Q: What does it mean if ownership in a business is “transferrable”?

A: That means that the person’s ownership in a business, called a “share,” can be given as a gift or sold.

Q: How does a company grow huge, like Google or Yahoo?

A: These big companies have publicly traded shares, where they are bought and sold on the stock market, such as the New York Stock Exchange.

Q: May a nonresident alien be a shareholder in an S corporation?

A: No, only U.S. citizens or resident aliens may be owners in an S corporation.

Q: As a nonresident alien, can I be an owner in other kinds of business?

A: Yes, as a nonresident alien, you can start any other kind of business.  You just cannot be an owner in an S corporation.

Q: How do I know what business type is right for me?

A: First, you should have a goal.  Once you know your goal, you find the business type that fits your goal.  There is something for almost every kind of business goal.

Q: How do I decide between an LLP and an LLC?

A: If you are going to operate in many different states, you may want to choose an LLP because the law is more or less the same in the several states.  If you are not going to operate in many states, you may want to choose an LLC because there is more protection for the personal assets of managing members than there is for managing partners in an LLP.

Q: Do I need to register a business if I am going to start one?

A: No.  You can start a business without registering it (although you might need a license in many states in order to legally conduct certain businesses).   However, it is good to register your business because this makes your business a separate entity from you, and your business can be responsible for its own debts and taxes.

Q: Can I have limited liability without registering my business?

A: No.  You must register your business with the state in which you are working in order to have limited liability.

Q: Do general partnerships or sole proprietorships offer limited liability?

A: No.  Only the business types mentioned above offer limited liability to the owners.

Q: I want to go into business by myself.  What kind of limited liability business should I choose?

A: You will probably want to choose an S or C corporation or an LLC.  These types of businesses in many states allow for just one owner.  LP’s and LLP’s are partnerships, which require at least two people.

Q: I already registered a business, but my needs have changed.  Can I change the type of business I have to a new one?

A: Yes.  Most states allow you to amend your business registration and take on a new type of business at any point, without interrupting business operations.

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