Which Business Entity Is Right For Your Business?
Business owners have several legal entities to choose from when structuring their businesses. Each has its advantages and disadvantages. Your choice depends on what you want to achieve, the problems you’d like to avoid, your goals, and your priorities. Laws regulating their formation and use vary by state. Below, you will find some common types of legal entities.
Sole Proprietorship
The simplest form of business structure to choose from is one where you own and operate the company. There are no forms to fill out or file. You’ll have a sole proprietorship by default if you do nothing to create an entity. You would be personally responsible for all business debts and liabilities.
Partnership
A partnership has two or more individuals sharing business ownership. Partners are responsible for each other’s decisions and actions, so you must choose your partners wisely. Partnerships can be formed just through how those involved handle the business, and there need not be an explicit agreement.
But if this type of entity interests you, all those involved would be better off if the parties create a written agreement spelling out how the business will be run, who will be responsible for what, and how the partnership can be broken up. A lawyer, like a partnership dispute lawyer from a law firm such as Focus Law LA can tell you that creating a written agreement can help avoid problems in the future.
Limited Liability Company (LLC)
An LLC joins elements of partnerships and corporations, providing limited liability for its owners (members) while allowing for flexibility in management and taxation. LLCs are popular for small to medium-sized businesses, and depending on what your company does, one can be formed for each project or venture you’re involved with.
Corporation
A corporation is separate from its owners (shareholders). Shareholders have liability so their personal assets are generally protected from business debts. A corporate structure can be more complex than others and require adherence to formalities. Like a partnership, shareholders can benefit from an ownership agreement.
There are two main types of corporations:
- C Corporation: Subject to double taxation (corporate income tax and individual shareholder taxes)
- S Corporation: Offers a more favorable tax treatment, with income passing through to shareholders without being subject to corporate income tax
Nonprofit Organization
Nonprofits are formed to achieve something other than generate profits. They may be organized as charitable organizations, educational institutions, or social clubs. Nonprofits enjoy tax-exempt status and must reinvest any surplus income into the organization’s mission. Forming a nonprofit doesn’t mean it can’t make money for you. Though there are limits and legal requirements, you may be able to pay yourself a salary as an employee.
Cooperative
Members operate and own cooperatives, who share their profits or benefits based on their participation. Cooperatives are often used in agriculture, retail, and housing.
Professional Corporation (PC) Or Professional Limited Liability Company (PLLC)
These entities are usually formed by licensed professionals (such as doctors, lawyers, architects, or accountants) to provide services. They offer liability protection for those involved while allowing them to practice their licensed profession.
Limited Partnership (LP)
This is similar to a general partnership but it has limited partners with limited liability who are uninvolved in daily operations. General partners have unlimited liability.
The Next Step
The choice of a business entity is a significant decision that depends on the nature of your business, the number of owners, how much potential personal liability you’re willing to tolerate, its simplicity or complexity, and tax considerations. Get financial and legal advice before deciding which structure is the best fit for your needs with the help of a lawyer.