Is an S-Corporation different than a C-Corporation?

Functionally, an S-Corporation (or "S-Corp") and a C-Corporation (or "C-Corp") are the same, but an S-Corporation is a corporation where the owners have decided to make a special election with the IRS to be taxed as a pass through to the owners (through IRS Form 2553), meaning that an S-Corporation is taxed like a partnership. Because it is taxed like a partnership but is a corporation, it also comes with some limitations (like ownership restrictions, including a restriction against foreign ownership and a limit to the number of owners, meaning you should check with an attorney for more information). However, both S and C corporations have shareholders, boards of directors, and officers.

How is a Limited Partnership different than a partnership?

There are many differences. For one, a limited partnership has limited liability for the limited partners, and can only be formed by a filing with the Texas Secretary of State's office. General partnerships, on the other hand, can be formed by verbal agreement without the necessity of filing anything with the Secretary of State's office.

What is a Limited Liability Partnership?

A registered limited liability partnership (LLP) is a partnership that has "registered" with the Secretary of State to receive special liability protections. Each partner in a partnership ordinarily has full personal liability for the debts of the business and the acts of their partners. In a limited liability partnership, however, a partner is not individually liable for obligations of the partnership arising from wrongful acts committed by another partner unless the partner participated in or was aware of the wrongful act at the time it occurred. To maintain this protection, the partnership must file an annual registration with the Secretary of State along with a fee. In addition, the partnership must maintain insurance or other security of at least $100,000 to cover the kinds of errors, omissions, negligence, incompetence, or malfeasance for which liability is limited. LLP is a common form of entity for professional service businesses due to the liability limitations for partner negligence.

What is a Limited Liability Company, and why is it so common now as a formation entity?

Limited liability companies (LLCs) are growing in popularity, are relatively new, and provide many advantages for businesses being formed. The process of forming an LLC is similar to that of forming a corporation in that it is formed through a certificate of formation. Like corporations, LLCs have continuity of life separate from their owners, offer limited liability protection to their owners, and must pay franchise taxes. Other features of LLCs are more like a partnership, providing flexibility and the benefit of pass-through taxation with no restrictions on the number of the owners unlike an S-Corporation. Texas allows single-owner LLCs, making them a great alternative to a sole proprietorship or an S-Corporation.

What are some common restrictions on S-Corporations, and why are more businesses using LLC's?

1. An S Corporation can have no more than 100 shareholders.
2. An S Corporation may have only one class of stock.
3. There are limits on deductibility of debt in S-Corporations.
4. If S-Corp has a home office, the tax deduction is only a 2% miscellaneous itemized deduction on Schedule C, because it is treated for tax purposes as an employee business expense. In a partnership or LLC, a home office is usually a 100% deduction on Schedule E.
5. All distributions by an S Corp must be made pro rata based upon stock ownership. An LLC, on the other hand, can make disproportionate to members distributions as set forth in the operating agreement.
6. An S-Corp is required to file an extra tax return and more payroll forms, and this costs the company more money. Conversely, the LLC can file its deductions on the Schedule C and designate itself as a “disregarded entity.”
7. If an S-Corp has high value assets and it goes out of business, the S-Corp’s assets are sold at FMV to the shareholders, thereby causing shareholders to incur larger capital gains. When an LLC closes, the assets are distributed to its members at basis, usually the cost of the assets.