Business Entity – 5 Types

Making that decision on the right business entity to suit your plans and goals can be a very tough call to make. Whatever your choice will be, you will be faced with two issues: the potential liability of the business entity you have chosen and the tax consequence of your choice. There will surely be legal paperworks to file with your decision to use the right business entity that will pave way for the structure of your company, from top to bottom. For many startups, choosing the business entity that will best reflect their business needs is quite confusing and it is crucial to seek professional advice in knowing the pros and cons of each business entity.

Choosing a Business Entity

Remember that choosing a business entity that’s best for you plays around taxes, liabilities, and book-keeping. For this reason, you will need all the professional business, legal, and tax assistance that you can get. You must also consider what your business is all about. This includes your products, services, man power, resources, and projected earnings. Do you envision growth for your business? Will there be major expansions on business operations in the future? How long do you see your business in the industry? Are there risks involved? These are questions you need to answer, which can help you choose the perfect business entity.

Types of Business Entity

Sole Proprietorship

This is the basic from of a business entity where you take over-all control of your business management. This means you will be personally accountable for your business where you will open your personal financial books, and be held liable to the responsibilities and operations of your business. This is also the least formal of all the business entities and has the least complicated issue when it comes to taxes. If you are going to raise funds for this business model, it may be tough to get loan approval and you’ll need to find other resources like your savings or home equity. ( State filing is not required )

Partnership

If you want to share your business ownership with someone you trust, but still have the option to manage your business like that of a sole proprietorship, this business entity is the right choice. Ownership can be shared by two people or more. The advantage of this business entity is that benefits are passed through the partnership without the burden of heavy tax on profits. However, there is no protection when it comes to the safety of personal assets in an event of a lawsuit. If you’re entering a partnership, make sure to define the investment, duties, profits, and responsibilities of each partner. This will help avoid future conflicts. ( State filing is not required )

Limited Partnership

This business entity must have one limited partner and any number of general partner. Unlike partnership, limited partnership is secured from personal liabilities arising from debts or mortgages. The partners in the business can only lose the amount of their investment. The limited partner is also required to show his or her personal assets when a liability is being imposed. A Certificate of Limited Partnership must be filed at the state department, and this will include the name and address of the general partner.

Corporation

This is the business entity that gives protection on personal liability of the business owners. The corporation is separate from those who have formed it and acts as a legal entity running the business. A corporation is subject to tax and liabilities. Although safe from personal liabilities, there is the disadvantage of higher tax cost and detailed book-keeping to deal with. There are two types of corporations, namely, the C Corporation and the S Corporation. C Corporations are for business owners who want independence, protection of personal assets, lesser restrictions, a distinct business entity, and greater chances of raising capital. The downside of a C Corporation is

double taxation, where both entity and shareholders are taxed separately. S Corporation is for those who want a formal, corporate identity but want more flexibility in taxes. There is limitation in ownership, where income is passed as the owner’s personal income tax, and double taxation is avoided. The business owner handles the burden of maintaining a good name for the corporation, where every decision is mandated by the corporate law. ( State filing is required for corporations )

Limited Liability Company or LLC

This is also called as a hybrid partnership chosen by those who want a business entity that is separate, is protected from liabilities, and with flexible ownership like that of a C Corporation – minus heavy formalities. This form of business entity is becoming popular, since it can give business owners the benefits of a corporation and a partnership. What’s great with this model is that profits or losses can be passed through to the owners without the risks of personal liabilities and taxation. If two or more people own an LLC, a separate tax return will be required.

Whatever your choice is, make sure that proper research has been made before you start a business. Make a check list of all necessary papers needed to be filed, put your records straight and clean, and define limits and responsibilities. The world of business is an ever-changing plane, where a sole proprietorship can evolve into a partnership, and eventually, into a corporation.. or vice-versa. This is an important decision that you will be making and starting with the right business entity model can help you jump start that ultimate dream of financial freedom. The last thing you want in starting your business is a huge loss, a mountain of debts, and law suits everywhere. Get Smart with Your Choices!

RESOURCES:

Entrepreneur Media, Inc. “ Choose Your Business Structure. “ 2009.

http://www.entrepreneur.com/homebasedbiz/legalissues/article38822.html

Colorado Department of State. “ How Do I Know Which Type of Business is Best for Me? “

http://www.sos.state.co.us/pubs/business/chooseco.htm

CorpNet, Inc. “ Choosing an Entity Type. “ 2008-2009.

http://www.corpnet.com/learningcenter/choosing-type.aspx

Bolt, Tom. “ Choosing a Business Entity. “ Tom Bolt & Associates, P.C.

http://www.vilaw.com/files/Business%20Entities%20Aviator%20Tom%205-06_1.pdf

The Metropolitan Corporate Counsel, Inc. “ Choosing the Right Business Entity. “ 2008.

http://www.metrocorpcounsel.com/current.php?artType=view&artMonth=July&artYear=2007&EntryNo=4263