If you are planning to start a business, you need to find out what types of business entities serve your purposes better. The entity you choose can make your or break you. Therefore, you need to choose wisely.
To help you set up your business, you will need advice and help from a business attorney. My staff and I can assist you in forming an entity that accommodates your business start-up plans. Book a call to speak to us here: https://mollaeilaw.com.
When you begin a business, you have 5 basic entities from which you can choose. While you can select from more entities legally, the following 5 entities represent the typical business formations of most start-up companies. As you will see, each entity has its own advantages and drawbacks.
Table of Content
|1.||The 5 Types of Business Entities|
|6.||Limited Liability Company (LLC) – One of the More Popular Types of Business Entities|
|7.||A Note about a Single-member LLC|
|8.||What Happens Next?|
The 5 Types of Business Entities
1. Sole Proprietor
Of the 5 types of business entities, a sole proprietorship is the easiest to start and set up. You don’t have to register the business with the state where you do business. Therefore, you can start right away.
Whether you are a fitness instructor, writer, or photographer, you can begin doing business the same day, or almost immediately.
However, becoming an SP has some decisive drawbacks, especially when it comes to asset protection or liability. If someone sues your business, he or she can also come after your personal assets, such as your car or house.
If you don’t have a car or house, you may not worry about this factor. However, you also have to consider some of the other drawbacks.
For instance, you do not have business continuity when your work as a sole proprietor. If you die, your business will also cease to exist. In addition, you cannot add another key member without turning the business into a partnership.
However, for the person who truly wants to work on their own and who wants a quick business launch, an SP may work out for a while. Another advantage of the entity is the ease in which you pay your taxes.
You don’t have to file an extra return. You only need to add a schedule C to your personal return when submitting your taxes.
If you want to go into business with another person, a partnership may work for you. However, if you choose this type of business, you need to have the type of partner that who will work with you to avoid disputes. Otherwise, your business can turn sour fast.
If you and your partner can get along, a partnership is a flexible operation and can be as easily terminated as it is created.
The best way to make this entity work is to make sure you and your partner possess complementary skills and knowledge. For example, if you are a strong marketer, your partner should be good at accounting.
Forming a partnership can be a good thing, as it allows you to benefit from certain tax allocations. These allocations enable you to divide what you make or what you report in losses any way you like.
If you draft a partnership agreement, make sure you stipulate that some of your unreimbursed costs can be deducted. You can find out more about these types of benefits when you speak to an accountant.
What is not so good about a partnership is the unlimited liability the partners assume in a general partnership arrangement. However, partnerships come in different forms, so this liability can be reduced.
If you want to know more about how a partnership may benefit you, contact me for all the details. The easiest way to do this is to simply email email@example.com.
A General Partnership
A basic partnership or general partnership is set up so each party shares in the financial and legal liability of the business. Therefore, each person is personally liable for the debts acquired by the partnership. That also means the profits are shared equally.
A Limited Liability Partnership
A limited liability partnership is often chosen by professionals, such as lawyers or accountants. This type of partnership protects a partner if his or her colleague is sued for malpractice.
Some professional firms distinguish between equity partners and salaried partners when this entity is formed. Salaried partners do not have a stake in the ownership of the firm. Instead, they usually are paid a bonus, based on a firm’s earnings.
A Limited Partnership
The limited partnership is a hybrid partnership of a limited liability partnership and general partnership. In this arrangement, one of the partners must be a general partner, or accept full responsibility for the company’s debts and liabilities. Therefore, one of the company’s partners is silent. Unlike the other member(s), he or she does not participate in the management of the company’s daily operations.
3. C Corporation
A C Corporation is a traditional corporation and therefore has default status under the rules of the IRS. It is differentiated from an S Corporation, which has elected a special tax status, and therefore possesses certain tax benefits. While a C Corporation is taxed under subchapter C of the IRS code, S Corporations are taxed under subchapter S.
Both of the corporations share the following features.
- Limited liability protection. This means the shareholders are not responsible for the corporation’s liabilities or debts.
- Separate entities. Corporations—both C and S—are created as separate entities through their state filings.
- Articles of Incorporation must be filed with the state.
- Divisional Responsibilities. While the shareholders are called the owners of a corporation, the corporation, itself, owns the business. Shareholders elect the corporation’s board of directors. Although the board of directors oversees decision-making and corporate affairs, it is not involved in daily operations. Instead, the directors elect the officers who manage the corporation’s day-to-day activities.
- Formal Activities. All corporations, regardless of their status, must follow certain formalities. These formalities include adopting bylaws, holding director and shareholder meetings, retaining a registered agent, filing annual reports, and paying the necessary filing fees.
4. S Corporation
The S corporation is basically the same set-up as the C corporation with some notable differences in how the owners and shareholders are taxed.
While corporations are taxed twice – first on their earnings, and then on the shareholder dividends, S corporations are taxed once, or enjoy pass-through taxation.
Also, an S corporation can only have 100 shareholders, all who must be U.S. citizens. C corporations do not have any restrictions placed on them with respect to shareholder numbers or citizenship.
5. Limited Liability Company (LLC) – One of the More Popular Types of Business Entities
It is true, an LLC is one of the more popular types of business entities for several reasons.
- An LLC can be formed without the formalities of a corporation.
- LLC owners enjoy pass-through taxation, so the business is not taxed. Rather the taxes are deducted from the owner’s personal income.
- An LLC usually benefits in operational terms, as members provide complementary skills and knowledge.
However, not everything is rosy when an LLC is formed. Sometimes, disagreements can lead to costly delays.
To avoid this problem, you should draft an operating agreement. While this document does not need to be filed when you register an LLC, it will resolve any disputes that may take place. Unlike a corporation, this entity can end if one of the key members leaves the business or dies.
A Note about a Single-member LLC
A single-member LLC is referred as a disregarded entity by the IRS. Therefore, a single-member LLC is treated, tax-wise, like a sole proprietorship. You need to file IRS form 8832 to be treated like a C corporation or subchapter S, and be registered as a single-member LLC.
What To Do Next
When it comes to reviewing the types of entities for businesses, you have to consult with a top business attorney. That is where I can help. Don’t establish your business without the proper legal support. Email firstname.lastname@example.org and schedule a consultation.
Now is the time to learn what entity will give your business the structure it needs. Think the process over carefully. That way, you can move forward with your business plans, and start meeting your goals more successfully.
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