So what are the different types of business entities? With everything you know by now in running a business, I know you want to start your own company soon. Or maybe you are searching for more knowledge about it. If you do then you are really wise and responsible. Before you start your business, you must know what business entity type it will take. According to state law. But what is it exactly? When an organization– created and owned by one or more person– conduct trades or business, it’s labeled by a business entity type to define its structure and taxation. Different types of business entities are… Sole Proprietorships, Partnerships, Corporations, S Corporations, and Limited Liability Company (LLC).
Business entity type determines legal and financial implications such as:
- The ease or difficulty of getting a business loan.
- The ease or difficulty of raising money from investors.
- Liability protection.
- Risk of exposure (If sued).
To understand and decide which entity is suitable for your business, we’ll define each type of business entities:
A business owned by one person or a married couple, that is a sole proprietorship. Automatically, if you start a business(whatever it is) and it’s only you as the owner, it will be labeled as a sole proprietorship by the law. No registration needed for this entity type. However, depending on your business industry, you still need a business permit or license. This is the easiest type to start. It doesn’t require much paperwork, easy tax filing, etc. But as the sole owner, you are personally responsible for everything.
Partnership is a business owned by two or more people. But depending on the type of ownership of the owners– it can be classified as General Partnership or Limited Partnership.
- In General Partnership, it’s almost the same with Sole Proprietorship. A company owned by two or more people. No registration needed to become a partnership. However, everything is shared. From profits, management, liabilities, losses to debts.
- Limited Partnership is categorized into two types of partners. The general partners are the one who manages everything and assumes liability for the business. Other partners are called limited partners. They don’t have control over the business and assumes only fewer liabilities. Basically, they only act as investors.
Usually, corporations are big companies. Under the law, this organization is a separate legal entity from their owners or shareholders. What does that mean? It means limited liability. Shareholders or owners get profits through dividends and stock appreciation but they are not personally liable to any debts or liabilities of the company. A corporation can also offer stock options for raising money. However, it is more expensive, more paperwork, more taxes, etc.
Like corporations, S-Corporations still has limited liability. However, for taxation purposes, profits and losses are pass-through to the owner’s personal tax. Also, unlike a corporation, this one doesn’t have corporate taxes and double taxes. It almost feels like a sole proprietorship or partnership. But it is also expensive to create, more paperwork, filings, and issuing stocks have more limitations.
Limited Liability Company (LLC)
If you combine some principles of corporation and partnership you’ll have an LLC. Best described as a hybrid of both entity types. Like a corporation, it offers limited liability or no personal liability when it comes to debt and liabilities. Like a partnership, it is less paperwork, requirements, and the business can tax as corporate or partnership (pass-through taxation). However, LLC doesn’t have stocks or stock formalities like a corporation does