Are you planning to form your own business? If yes, you might be familiar with LLC and LTD. You see, LLC and LTD are different entities, but there’s still a large difference between the two. One main difference is that LTDs pay tax, but LLC doesn’t. Before you choose your path- it is best to consult with a business expert to help you avoid mistakes
Before we go the difference between LLC and LTD tax, let’s first talk about their meanings:
What Is LLC?
LLC or Limited Liability Company is under state law. LLC members are simply called “members.” When you’re an LLC member, you can file your personal tax return. We call this “pass-through taxation,” wherein the company’s net income goes to the LLC then to the members.
Note: LLCs aren’t taxed, but some states may impose a tax to a partnership or corporation. Members of LLCs enjoy benefits such as no annual meeting and recording requirements. LLC doesn’t allow its members to dispense stock.
Here are other benefits of being an LLC member
Don’t worry about debts and liabilities because LLC wouldn’t give you that headache. LLC protects its members from any debt or liability through member protection benefits. As an LLC member, you’re allowed to participate in any operation of the company or assign tasks to managers. All LLC members get liability protection regardless of the tasks they’re doing in the company.
Personal Liability Protection
When it comes to a limited partnership, limited partners have liability protection. But the general partner doesn’t have similar protection, and he or she is responsible for the actions of the limited partner.
The limited partner isn’t allowed to engage in any business transaction of the general partner because of the limited partner’s loss of liability protection. Also, the limited partner would be accountable for the general partner’s actions.
Keep in mind: The limited partner acts as a silent partner and can contribute money, but the partner isn’t allowed to participate in business transactions.
You might hear of Series LLC if you’re living in Delaware. Well, Series LLC is present in some states that improve your liability protection and also helps protects business assets. The assets of your LLC pass through small business entities that we call “Series.” The series company is managed differently from your main LLC or company.
If you plan to create a series LLC, Delaware is one of the best states to start your business. Other states such as California and New York have strict rules in constructing Series LLC. The laws on these states might be unfavorable to your company’s growth.
What Does Ltd Mean?
The limited abbreviation Ltd doesn’t refer to a single business entity as most people thought. Ltd. represents different entities such as C and S corporations.
If you’re living in the European Union, you will notice that most businesses there are Ltd. But the EU holds certain laws that govern the amount of shareholders a company could have.
LLC and Ltd – The Difference
Structuring your business isn’t easy. You need to give time and effort so that you don’t face big hassles in your business endeavor. One of the first things to consider is the difference between limited partnerships (Ltds) and liability companies (LLCs).
Since both LLC and Ltd Tax come from state law, most people think the entities are similar. Well, yes in some point, but there are still differences
Main Differences of Liability Companies and Limited Partnerships
- Tax of the company
- Liability of the entity owners
- Number of shareholders
Limited partnerships are present in commonwealth countries. Limited companies are considered as distinct entities that means the companies are legally separated from the shareholders and the owners. The company shares are restricted to some people, such as the founders of the state.
LLC often reflects unincorporated associations. Liability companies and corporations share essential characteristics that you need to know.
Here’s an example:
Company owners of both liability companies and corporations benefit from liability protection and pass-through taxation.
Single owners of small businesses choose the limited liability company because of the benefits they can get. A limited liability company can select how the company is taxed:
- Single business owner
- S corporation
- C corporation
If you’re in a limited partnership, you and your partner should decide if the business should be taxed separately or taxed from the tax returns of both partners. Partners often choose the latter because the company wouldn’t be taxed twice.
The structure flexibility is also different between LLC and limited partnership. A single person can manage a limited liability company, while a limited partnership (as the name suggests) requires two people to manage the entity.
Hence, solo business owners often structure their small business on LLC.
Taxes and Shares
A limited partnership has variations in tax-paying, while limited liability companies are flexible when it comes to taxes, unlike corporations.
Companies that are under the “C” corporation category are taxed as single business entities. Shares of entities often remain private rather than in public.
Shares of Ltds are used to choose members of the entity or select the co-founders. If a share isn’t issued, a pre-authorization is required. The share transfers are often in a private agreement. But there are also occasions that the transfer is online.
Pros and Cons of Corporations
Besides LLC and Ltd, you can also structure your business from a corporation. But keep in mind that there are advantages and disadvantages of forming a corporation structure.
One big advantage is you can attract investors by issuing the company shares. Corporations also have the advantage of lowering taxation by splitting the company’s income.
When it comes to the disadvantages of corporations, taxes are a big example. For example, A C Corporation can face double taxation because the company’s earnings are taxed directly and shouldered by the entrepreneur’s tax return.
Another drawback is owners of corporations need to follow strict formalities such as shareholder meetings. Corporation owners only have 100 shareholders that limit the company’s growth.
So, what do you think? Are you going for a LLC or Ltd structure? If not, you might consider growing your small business into a corporation.
Give it a try now and become successful in the future!