How Different is an LLC from Other Businesses?

Significant differences between a Limited Liability Company and other types of businesses include tax collection, financial liability, governance and fundraising. As the name implies, forming an LLC in California grants reduced liability compared to a sole proprietorship or a general partnership. Although corporate entities can form an LLC, an LLC is far different than a corporation and shares attributes with a Limited Liability Partnership.

Sole Proprietorship

This type of business is usually owned by a single individual. It can be owned by a husband and wife and still be considered "sole" for tax purposes. The liabilities of the sole proprietorship belong to the owner, who usually establishes a separate bank account for the business. About 78% of sole proprietorships are microbusinesses that have grossed less than $2.5 million over the last three years. For manufacturers, employing 25 people or less constitutes a microbusiness.

About 34.9% of all businesses in California are sole proprietorships.

Partnership

Similar to a sole proprietorship, the liability of a partnership falls on the partners, so the profits and losses are shared and the business usually has its own bank account. Partnerships can have one or more general partners who are liable for business obligations, and a limited partner who is only responsible for their investment in the business. Partnerships do not pay income tax, but limited partnerships pay an annual tax of $800.

Partnerships make up ~3.8% of California businesses.

S Corporation

S corporations, or "sub-corporations," can be formed within a partnership or LLC and may be taxed under Subchapter S as a corporation. S corps can have up to 100 shareholders, and they do not pay income tax at the federal level. Like limited partnerships, S corps taxed under civil law as an LLC or corporation pay an $800 annual tax.

S corporations form less than 0.1% of California businesses.

Corporation

Several types of corporations exist: Mutual or Public Benefit or Religious Domestic Nonprofits; Close, General or Professional Domestic Stock; Flexible Purpose and Benefit - these two are new Stock corporation subtypes as of January 1, 2012 - and Foreign Stock. These are the most common corporations. Forming or becoming a corporation is a lengthy and arcane process that requires careful attention to subtle variations in business structure and purpose. Many people consult an attorney to ensure legal compliance when establishing corporations.

Overall, corporations make up 57.8% of California businesses.

Limited Liability Partnership

Unlike general and limited partnerships, LLPs grant equal liability protection to each partner. California only allows LLPs to be formed for business that engage in accounting, architecture or law. An LLP wishing to do business in the state must register with the Secretary of State before doing so. Like a limited partnership, an LLP pays an annual $800 tax, but no income tax.

LLPs constitute approximately 0.3% of state businesses.

Limited Liability Company

LLCs offer more flexibility with many of the benefits granted to other business types with fewer disadvantages. LLCs can be sole proprietorships owned by one person or partnerships with several members. The advantage of forming an LLC in California over a partnership is similar to that of a limited partner: Partners in an LLC are responsible only for their individual investments. The benefits of a general partnership apply also: Partners may have an equal say in management, as long as the LLC's articles of organization allow.

LLCs account for 3.2% of California businesses.