LLCs, LLPs and Corporations

The following is a transcript of "The Legal Lad's Quick and Dirty Tips for a More Lawful Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Hello, and welcome to Legal Lad's Quick and Dirty Tips for a More Lawful Life.

But first, a disclaimer: Although I am an attorney, the legal information in this podcast is not intended to be a substitute for seeking personalized legal advice from an attorney licensed to practice in your jurisdiction. Further, I do not intend to create an attorney-client relationship with any listener.

Today's episode is a crash course in the differences among sole proprietorships, LLCs, LLPs and corporations. Geoff wrote:

Are LLCs really able to limit a person's liability? It seems like it is too easy, and I always worry when things seem like they are too easy to be real. Is there really a meaningful benefit to using these structures?

The short answer, Geoff, is that LLCs really are able to limit a person's liability, and there are several meaningful benefits to forming an LLC. To fully understand the pros and cons of an LLC, it is necessary to understand how an LLC is different from an LLP and a corporation.

Many Americans share the dream of creating their own businesses. You get to be your own boss, directly reap the rewards of your toils, and contribute to your community. Let's use a bakery as an example. If you have some savvy with your stand mixer, you might envision opening a small bakery out of your kitchen. But your bakeshop business can take one of several forms.

Sole Proprietorship

The simplest is the sole proprietorship. Basically, a sole proprietorship is a business you create, you fully own and for which you are fully responsible. You do not have to get approval for the bakery from the government before you start. (You must still follow health and safety laws, still report any income for tax purposes, etc.)

A major advantage to the sole proprietorship is that you are the boss and get to keep all profits. Typically, you are personally taxed on profits as your income.

But, the major downside is that you are fully responsible for any debts incurred by the business, and you are open to unlimited liability. Another downside is that your business dies when you do.