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What business entity should I choose? Corporation, S-Corp, LLC, or Partnership?

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You and some friends have come up with a great business idea. You are excited that the idea has huge potential to disrupt the market and become a smashing success.  Your first steps will include a business plan and setting up your business entity.  You ask yourself: What kind of business entity should I form?  Your options may include: Limited Liability Company (LLC), Corporation, S-Corp, or Partnership.

How will you decide?

You are on the right track to consider these various options, because each carry certain advantages that may be of benefit to your business. Corporations were originally formed to provide liability protection to investors; you could lose what you put in, but that was the extent of your exposure. Corporations were treated in law as “persons” and held to have an existence separate from their shareholders which justified this treatment.  Corporations were the first tool to protect personal assets and shield the business owner from personal liability.

However, if corporations were persons, they could be taxed. This led to the issue of “double taxation”: as a shareholder of a corporation, you were not only taxed on the income (dividends, etc.) that you earned from the corporation, but the corporation itself was also taxed on such income.

Naturally, savvy businesspeople – and their accountants and tax lawyers – sought a way around this double tax treatment. They fastened on the partnership, which is a group of individuals bound by contract but not an entity separate in itself. Therefore, the partnership itself was not subject to tax; only the partners were taxed on the income. 

The partnership idea seemed great!  Less taxation, brilliant!  From a legal standpoint, the partnership is not separate from the partners, and therefore, when something happens (as it always does)… each partner is liable for his or her share of the damages. A partnership offered potentially better tax treatment but sacrificed personal liability protection. 

Then some clever lawyers had an idea: what about an entity that was taxed like a partnership… but treated like a corporation when it came to liability? The best of both worlds, right?

In response, the following hybrids were created in an ongoing effort to realize this dream:

  • S-Corp.  Wonderful idea: a full-on corporation taxed like a partnership. Mission accomplished, right? Well… not quite. The law imposes strict limits on how many investors you can have – and of what kind – and otherwise burdens this good idea with requirements that reduce its utility.  A common misconception is that the S-Corp is a separate type of entity.  S-Corp is a tax designation, not an entity type.  In a separate blog, we will address this misconception in more detail. 
  • Limited Partnership (LP).   This is the S-Corp, in reverse – an actual partnership, taxed like a partnership, but with corporate protections for all the limited partners, i.e., the folks who put in the money but don’t do the work.  It also proved to be somewhat awkward to administer for most businesses – and nearly all small businesses – but it continues to be popular in certain industries, e.g., oil & gas, private equity, etc.
  • Limited Liability Company (LLC).  These hybrids are the result of continuous efforts to combine – or shall we say, refine – the benefits of both S-Corps and LP’s.  The LLC is like a corporation in that it provides liability protection for investors (called “Members”); one is only liable up to the limit of her investment.  However, it may elect to be taxed like a partnership – meaning that there is only one level of taxation.  Furthermore, it is also a creature of contract, meaning that the members collectively decide on how the business and affairs of the company are to be managed and the collective rights and obligations of each member.

There are a number of considerations that go into the selection of one form of business entity versus another. The trend in the law and in the business community is toward the LLC because it provides liability protection, single-taxation, and maximal flexibility in administration. If you want more information on LLCs then take a look at our detailed blog and video on the Limited Liability Company (Five Reasons to Choose a Limited Liability Company) to describe how the LLC structure can benefit you and your business.

If you are starting a new business and not sure where to start, check out our video and blog post entitled: 6 Key Steps to Starting a Business

Client Reviews

We are proud to have more than 100 five-star reviews across Google, Avvo, and other platforms.
  • Being a first time business owner, you want to make sure you're making all the right decisions. Choosing McCormick Law & Consulting, along with Emma and Taylor, made the process so easy! Emma understood right away what my primary concerns were, and was able to execute everything in a very timely manner! She was extremely easy to talk to and she took the time to explain everything to me, settling my nerves with taking this next big step. Taylor made the process of making it all official completely stress free.
    Crystal G.
  • I am a criminal defense attorney licensed in both North Carolina and Virginia. I have taught attorneys across the State of North Carolina on varying trial matters ranging from jury selection to DWI defense. I definitely could have created my new business, Davis Wealth Management LLC, but boy that would have been a mistake. Because business formation is not an area in which I practice, I had no idea where my blind spots were, and let me tell you there were plenty. The knowledge I received from the firm is invaluable.

    John McCormick and his firm are very reasonably priced and quickly and efficiently assisted me in creating my new business. It was completely turn key; they did everything for me.

    I can't recommend their services enough. Also, huge shoutout to Taylor who kept me informed every step of the way!

    James D.
  • I highly recommendMcCormick Law & Consulting! My Father and I live in two separate states and the properties he needed legal services for are in Virginia. I reach out to Taylor on two separate occasions and she was very responsive and professional. The first time we used their services it went so smoothly that by the time I needed their services again I knew I could just send over the necessary documents, pay my invoice and rest assured it would all get taken care of. They eliminated the stress that comes with handling some else's affairs and I so appreciate that.
    Heather C.
  • From the the very 1st conversation with their office it was clear they would be responsive to all my questions and any support with my business. They are relatable and make their customers feel comfortable with any questions and or concerns that might arise while using their services. I am happy to have found them to support me with my small business needs!
    Lisa N.
  • I can't say enough great things about the professional team at McCormick Law & Consulting! We really had no idea of who to trust and who we could count on for quick and professional service in the Hampton Roads area for getting our new business up and running smoothly and the Team at McCormick Law & Consulting really knocked it out of the park with us!
    Jerry G.
  • I had the good fortune of working with McCormick Law on a business sales contract. I sent them the initial draft provided by the buyer along with a few notes about my specific concerns. They carefully went through the document and provided meaningful additions and corrections that better protected my interests. Thanks to Bobby and John for their personalized attention.
    Arthur B.
  • Mr. McCormick and his entire team were amazing! They assisted me in a legal matter concerning a business dispute. Mr. McCormick is highly experienced, ethical, dedicated, and was prepared to fight my legal matter in court if necessary. I thank the entire team for believing in me and would highly recommend them to anyone!!
    Jeanette L.
  • We used McCormick Law to start up another LLC and it was a great experience. I have used other lawyers and attorneys in the past and I experienced delayed responses and it was what I have come to expect.From the first interactions with Robert and his team, I was surprised to how responsive they were. I even mentioned to my new business partner that this was not normal and I was very happy.Needless to say I will be using McCormick Law for all of my business needs in the future.
    Colton S.
  • I utilized this firm for help on a real estate matter. I felt comfortable with the advice I received and am happy to continue doing business with them and referring others to the practice. Everyone I engaged with was welcoming and made the process very easy.
    Christian S.
  • John and his team were great to work with. They provided advice for starting my business and set everything up in an efficient and timely manner. I will definitely recommend them to others!

    Elizabeth H.
  • I contacted McCormick Law firm to register my moving service in NC. They did an outstanding job. Completed the process way sooner than I expected. Thank you, Taylor.

    Steve T.

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    McCormick Law, PC d/b/a McCormick Law & Consulting is a boutique business and real estate law firm located in Norfolk, Virginia & Raleigh, North Carolina, that seamlessly serves clients throughout Virginia and North Carolina. Whether you are a new or existing client of the firm, McCormick Law, PC, cannot represent you on any new matter until the firm has made a determination that there is no conflict of interest and that it is willing to accept the new engagement. The testimonials on this website reflect the real-life experiences and opinions of our clients. However, the experiences are personal to those particular clients, and may not necessarily be representative of all clients. We do not claim, and you should not assume, that all clients will have the same experience. Your outcome may vary.

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