Small Business

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Intellectual Property

What Are the Differences Between a LLC, Corporation & Sole Proprietorship?

The business structure you select influences the paperwork you need to file, your ability to raise money, how much you pay in taxes, your personal liability and more. You want to choose carefully. For only $149 + state filing fees, Launch by LegalShield connects you with an experienced lawyer that will help you select the right business structure, as well as create and file all the necessary paperwork.

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While you may convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and other complications. Consulting with a LegalShield lawyer can set you up for success from the start.

Business Type Comparison Chart

Tax Implications
LLC profits or losses are passed through to owners for tax purposes unless they choose to be taxed as a C or S corp under the IRC. Single owner LLCs are taxed as sole proprietorships by default, while multi-member LLCs are taxed as partnerships under subchapter K or the IRC. LLCs may also have to pay a franchise, income and other business-related taxes.

Corps default to subchapter C of the IRC and pay taxes on profits and shareholders pay taxes on their dividend income from the corporation. If an S corporation status is elected then profits and losses pass through to shareholder tax returns for tax purposes. Nonprofit corporation may be tax-exempt if the necessary paperwork is filed and approved as well as eligibility conditions are met.

Sole proprietors report their business profits on their personal taxes.
Formation Requirements
Choose a name, file articles of organization, and appoint a registered agent in your state of choice, which is often the home state for the business.

File corporation name, articles of incorporation, and appoint a registered agent, appoint directors, elect officers and issue stock to shareholders. Corporations can elect to be taxed as an S corp by filing Form 2553 with the IRS. If available, requirements to become a “B” or benefit corporation vary by state.

Sole proprietorships are not a legal business entity, but you must file for the necessary permits and licenses to do business as well as pay taxes.
Setup Costs
State LLC formation paperwork is required and fees range from $50 to $550.

Incorporation formation paperwork is required and fees range from $50 to over $1000.

Sole proprietorship does not require the same formation paperwork and does not require any state filing or fees.
Personal Liability
Members are generally protected from personal liability as long as business finances, books and records are kept separate from personal finances and they don’t personally guarantee business debts, engage in illegal activity, or fail to properly remit employee payroll withholding taxes.

Shareholders are generally protected against personal liability unless personal guarantees are provided for business obligations or debts, personal and business funds are commingled or shareholders perform fraudulent or illegal acts.

Unlimited personal liability for business debts and claims.
Management Structure
LLCs are managed by all its members or may elect to be managed by a designated member or managers.

Corporation shareholders elect a board of directors, who in turn select officers for day-to-day management positions.

Sole proprietorships are managed entirely by the owner.
Annual Maintenance
LLCs are required to remit any applicable income, franchise and other business taxes. Most states require annual or biennial reports with filing/compliance fees in addition to maintaining books and records of members, managers, business licenses, financial statements, and operating agreements.

Corps are required to file and pay applicable income, franchise and other business taxes. Corps are also required to file state annual (or biennial) reports with filing/compliance fees and must hold and prepare minutes for annual shareholder meetings, as well as books and records of members and managers, business licenses, financial statements.

No separate report filing requirements and income taxes are paid on the personal federal and state returns but other business licenses and taxes may be required.
Growth
LLCs may sell membership interests as a means of fundraising, and have flexibility when it comes to the distribution of profits.

Corporations may authorize and issue additional stocks to existing shareholders and new investors in order to raise capital as well as offer different classes of stock depending upon the tax status.

Sole proprietorships cannot issue stocks or sell membership interests and must rely upon other sources of funds, such as loans.
Changing Ownership
LLC members may be allowed to withdraw by selling or transferring their membership interest depending upon the operating agreement terms and state law.

Corporation shareholders can sell their stock in the company to other shareholders or outside parties, depending on the shareholder agreement terms.

Sole proprietorships can sell any intellectual property, licenses, customer lists, and other assets.
Supported by LegalShield
Forming an LLC is covered with Launch by LegalShield.

 

*Multiple member LLC’s will incur additional fees. A 25% discount from the provider law firm’s hourly rate is available to members for services not otherwise covered with the Launch product.


Forming a Corporation is available through our Small Business Legal Plans and the 25% discounted hourly rate through your provider law firm will apply.

Based on your business, LegalShield can assist sole proprietors with our Personal + Home Business Supplement Legal Plan or our Small Business Essentials Legal Plan.
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Business Type Comparison Chart

 

Tax Implications

LLC profits or losses are passed through to owners for tax purposes unless they choose to be taxed as a C or S corp under the IRC. Single owner LLCs are taxed as sole proprietorships by default, while multi-member LLCs are taxed as partnerships under subchapter K or the IRC. LLCs may also have to pay a franchise, income and other business-related taxes.

Designated Consultations

Choose a name, file articles of organization, and appoint a registered agent in your state of choice, which is often the home state for the business.

Setup Costs

State LLC formation paperwork is required and fees range from $50 to $550.

Personal Liability

Members are generally protected from personal liability as long as business finances, books and records are kept separate from personal finances and they don’t personally guarantee business debts, engage in illegal activity, or fail to properly remit employee payroll withholding taxes.

Management Structure

LLCs are managed by all its members or may elect to be managed by a designated member or managers.

Annual Maintenance

LLCs are required to remit any applicable income, franchise and other business taxes. Most states require annual or biennial reports with filing/compliance fees in addition to maintaining books and records of members, managers, business licenses, financial statements, and operating agreements.

Growth

LLCs may sell membership interests as a means of fundraising, and have flexibility when it comes to the distribution of profits.

Changing Ownership

LLC members may be allowed to withdraw by selling or transferring their membership interest depending upon the operating agreement terms and state law.

Supported by LegalShield

Forming an LLC is covered with Launch by LegalShield.

*Multiple member LLC’s will incur additional fees. A 25% discount from the provider law firm’s hourly rate is available to members for services not otherwise covered with the Launch product.

LNCHLGL

 

Tax Implications

Corps default to subchapter C of the IRC and pay taxes on profits and shareholders pay taxes on their dividend income from the corporation. If an S corporation status is elected then profits and losses pass through to shareholder tax returns for tax purposes. Nonprofit corporation may be tax-exempt if the necessary paperwork is filed and approved as well as eligibility conditions are met.

Designated Consultations

File corporation name, articles of incorporation, and appoint a registered agent, appoint directors, elect officers and issue stock to shareholders. Corporations can elect to be taxed as an S corp by filing Form 2553 with the IRS. If available, requirements to become a “B” or benefit corporation vary by state.

Setup Costs

Incorporation formation paperwork is required and fees range from $50 to over $1000.

Personal Liability

Shareholders are generally protected against personal liability unless personal guarantees are provided for business obligations or debts, personal and business funds are commingled or shareholders perform fraudulent or illegal acts.

Management Structure

Corporation shareholders elect a board of directors, who in turn select officers for day-to-day management positions.

Annual Maintenance

Corps are required to file and pay applicable income, franchise and other business taxes. Corps are also required to file state annual (or biennial) reports with filing/compliance fees and must hold and prepare minutes for annual shareholder meetings, as well as books and records of members and managers, business licenses, financial statements.

Growth

Corporations may authorize and issue additional stocks to existing shareholders and new investors in order to raise capital as well as offer different classes of stock depending upon the tax status.

Changing Ownership

Corporation shareholders can sell their stock in the company to other shareholders or outside parties, depending on the shareholder agreement terms.

Supported by LegalShield

Forming a Corporation is available through our Small Business Legal Plans and the 25% discounted hourly rate through your provider law firm will apply.

 

Tax Implications

Sole proprietors report their business profits on their personal taxes.

Designated Consultations

Sole proprietorships are not a legal business entity, but you must file for the necessary permits and licenses to do business as well as pay taxes.

Setup Costs

Sole proprietorship does not require the same formation paperwork and does not require any state filing or fees.

Personal Liability

Unlimited personal liability for business debts and claims.

Management Structure

Sole proprietorships are managed entirely by the owner.

Annual Maintenance

No separate report filing requirements and income taxes are paid on the personal federal and state returns but other business licenses and taxes may be required.

Growth

Sole proprietorships cannot issue stocks or sell membership interests and must rely upon other sources of funds, such as loans.

Changing Ownership

Sole proprietorships can sell any intellectual property, licenses, customer lists, and other assets.

Supported by LegalShield

Based on your business, LegalShield can assist sole proprietors with our Personal + Home Business Supplement Legal Plan or our Small Business Essentials Legal Plan.

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How LegalShield Works

Finding solutions to your legal issues doesn’t have to be stressful, complicated or expensive.

LegalShield puts the power of legal representation within reach of any individual, family, or business. We work hard to make it easy, simple, and affordable to get the legal help you need, when you need it.

How LegalShield Works

Finding solutions to your legal issues doesn’t have to be stressful, complicated or expensive.

LegalShield puts the power of legal representation within reach of any individual, family, or business. We work hard to make it easy, simple, and affordable to get the legal help you need, when you need it.

Get Help Selecting the Right Business Structure

Launch by LegalShield includes a consultation with a lawyer where they will help select the right business structure for your business, business name check, preparation and filing of all entity formation documents, your EIN and three months of legal support.

$149 + State Filing Fees

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