Which business entity is right for your new business is one of the most important decisions you will make in the startup process. Choosing the right balance between legal protections and benefits is integral positioning yourself for success and avoiding future pitfalls. There are four basic types of business entities to consider. Each has its own pros and cons.
The structure chosen will affect the way your business runs. It impacts taxes, liability, and even who controls the company. Choosing the right entity will give your business an advantage in achieving your professional and personal financial goals. Becker Goodey will help you through this important process.
Types of business entities
- Sole proprietorship
This is the most common and simple form of business entity, chosen by more than 70 percent of businesses in America according to the Small Business Administration. In a sole proprietorship, one person is legally responsible for all a company’s decision, profits, and liabilities. The sole proprietorship is the ‘default’ if you do not choose another type of entity. It has the most control and may be the right choice for low-risk businesses or those ‘testing the water’ in business before setting up a more formal business plan.
This business entity is for ventures owned by two or more individuals. The two types of partnerships are general partnerships, an equal share of the business; and limited partnerships, where one partner has operational control while the other person(s) invest financially and receive only part of the profit. Partnerships can carry a dual status as a sole proprietorship or limited liability partnership (LLP), depending on the entity’s liability structure and funding.
When choosing a partnership, a partnership agreement is vital to success and avoiding future stress on the business and the relationship of partners involved. This is separate from your business structure filing you choose and should not be a missed-step.
- Limited liability company (LLC)
A limited liability company is a hybrid which allows owners, partners, and investors to limit their personal liabilities, tax benefits and flexibility for partners. With an LLC, there is personal liability protection for members from the debt of the business (such as personal vehicles, your home & savings account). Its protections are contingent on members acting in a legal, ethical and responsible manner when carrying out the duties of the business.
A corporate entity offers the most protection, separating the business liability from its owner or owners. It enjoys its own legal rights, separate from its owners. A corporation can sue, be sued, own and sell the property, and even sell the rights of ownership in the form of shares or stocks in the business.
There are multiple types of corporations. A business may consider a C corporation, S corporation, and B corporation. It can be difficult to decide which corporation is best for your business. There are eligibility requirements before you start your business and responsibilities which must be adhered to by the corporation to preserve your legal corporate protection. Setting up a board of directors is just one step of incorporation and affects future operations.
As you begin the process
Consulting with the right expert can help clarify and remove stress from this important step. Considering that most businesses can fit into more than one type of structure, it can be difficult to decide which one is right for you. Your new business’s financial requirements, your potential liability and growth potential are important factors to consider. Switching your legal structure after you’ve registered your business can be complicated and costly, so wise choices now are a crucial step not best taken alone.
Considerations for complexity, liability, taxes and how your business entity will affect your daily operations are all-important factors. Funding options from outside sources for your business consider the entity structure chosen, as well.
Licenses, permits, and regulations to operate legally will be the next step after determining the right entity. Every business must be licensed and possibly need additional permits in addition to legal entity structures. Where you are located, the type of business and its activities determines licensing needs at the local, state and federal levels. Becker Goodey can help you navigate that path as well.
It’s important to note that the structures discussed here only apply to for-profit businesses. After you’ve done your research about which business structure is right for you, speak with a business law attorney at Becker Goodey. An initial free consultation is available to all of our new clients. We invite you to call 702-258-1008.
For more information on the types of business structures you should choose, the Small Business Administration website is a free resource. This article is for informational purposes only and does not constitute legal advice or establish an attorney-client relationship.