Please explain me like I’m five what is the difference between the different options to incorporate a company in the US. What are the advantages and disadvantages of each option.
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Corporation: An organization with shareholders and a board of directors. A lot of how corporations are organized is determined by statutes. A corporation’s owners aren’t responsible for the corporation’s liabilities. All corporations that are organized for profit are either C-corporations or S-corporations.
C-Corporation: a corporation that pays tax on its own earnings. Then if it distributes earnings to its stockholders, they pay tax also.
S-Corporation: a corporation that doesn’t pay tax on its own earnings — instead, its earnings only show up on its stockholders tax returns. There are strict limits on who can own S-corps.
LLC: an entity where how it is organized is mostly determined by agreement among the owners. It can choose to be taxed as a C-corporation, but typically doesn’t pay taxes on its own earnings and, instead, passes them through to its owners (who are called ‘Members”). An LLC’s owners also aren’t responsible for its liabilities.
Partnership: Similar to an LLC, but the owners (called “Partners”) are responsible for the partnership’s liabilities. These don’t really need any written agreement and are sometimes formed by accident.
LLP: Just like an LLC, but “P” means “partnership” and not “company.” From an ELI5 perspective, think of it just like an LLC.
Sole Proprietorship: A guy goes into business for himself, doesn’t form any company. He’s responsible for all of the company’s liabilities.
For a layperson a big part of the structures u/Bob_Sconce goes into refers to how the owners/managers of the company are at fault when something goes wrong.
For example if I own a company and the company goes bankrupt, the people I owe money to can sue *me* for the money. That’s obviously a problem for me, so if I run a corporation and I make a ton of money (assuming it’s totally legally and normally) and the company goes bankrupt, than the debtors are kind of screwed, they can’t sue *me* (or the other owners/managers) because *the corporation* owes them money, not me.
The same goes for risk and insurance. Let’s say I have a building design corporation Buildings 101 and there’s a big lawsuit I can’t afford, I can just close my company and then start up Buildings 102 tomorrow.
It’s obviously a bit more nuanced than this, but the core point is shifting liability and risk away from the actual people who run a company to the company itself.
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