What Are the Different Types of Business Entities?

Starting a business goes beyond choosing the type of product or service you want to provide. You need to determine the business structure, as this factor will significantly affect how you operate, the tax structure, how you'll raise money from investors, and the risks you'll have to deal with in a legal battle. Different Types of business entities exist, each with its mode of operation. This article will look at the types of business structures to help determine which is best for you.

Limited Liability Company

Limited Liability Companies (LLCs) are hybrid businesses that combine features of sole proprietorships and corporations. LLCs are typically separate entities from their owners, so company executives cannot be held liable whenever things go wrong. LLC executives also have the freedom to decide the tax structure of the business. However, LLCs typically pay taxes like partnerships: through the owners' personal tax returns. There's no limit to the number of owners you can have in a Limited Liability Company, and board meetings are optional. That said, LLCs can be complex to establish due to the excessive legal paperwork and fees required. It's also quite complicated to attract investment funds from venture capitalists and grant shares in Limited Liability Companies.

C Corporation

C Corporations are also business entities that are independent of their owners. Typically, control of the company falls to shareholders (the owners), a board of directors, and officers. As such, board meetings are mandatory. That said, it's possible to establish a C Corporation where one person controls everything and fulfills the roles of the shareholders, board of directors, and officers. You can also pass on a C Corporation to an heir. Taxation for C Corporations occurs twice: the state taxes the business and the owners' personal income from the company's dividends.

S Corporation

An S Corporation typically functions the same way as a C Corporation in terms of liability. In other words, the owners are separate from the business and cannot face legal action when the company faces any challenges. However, there's no double taxation. Usually, S Corporation owners report the business's profits and losses on their personal tax returns. There's also a limited number of shareholders an S Corporation can have. While this factor might limit the ability of S Corps to raise funds by increasing their shareholders, it's easier for current shareholders to sell off their shares to raise capital for the corporation.

Sole Proprietorship

A sole proprietorship is the easiest type of business to set up and the most popular in the United States. You typically don't need to register a sole proprietorship with the state, and tax filing is less complex than other business types. However, in a sole proprietorship, you're legally liable for the business's debts and liabilities since there's no separation between you and the company. Raising capital for a sole proprietorship is also more challenging as investors prefer corporations and LLCs.

Partnerships

Partnerships are similar to sole proprietorships, as they're straightforward to establish and don't require registration with the state. However, unlike a sole proprietorship, more than one person is responsible for a partnership. Two types of partnerships typically exist: general partnerships and limited partnerships. In general partnerships, all partners own and manage the company and are legally liable for its debts. However, in limited partnerships, there are two types of partners: general partners and limited partners. General partners actively manage the day-to-day running of the business, and they're also 100% liable for any challenges the company may face. On the other hand, limited partners are more like investors. They do not actively manage the company daily and are only liable for the company's debts relative to their investment percentage.

Disclaimer: We don't recommend sole proprietorships or general partnerships. Because the owners are not separate entities from the business, the risk exposure for both business structures is quite excessive. On the other hand, LLCs and corporations offer better risk protection to their owners.

Conclusion

Starting a business is one of the most significant lifetime steps you can take. However, rather than jumping in head-first, you need to do due diligence, especially on the type of business structure you want to run. At Manning Carroll Law, we assist and advise small business owners on business formation, contracts, trademarks, and business succession planning. Check out our Small Business Bundle to get all the information you need to start your business off on the right foot. Why risk starting your company uninformed when you can leverage our professional expertise? Reach out to us today to find out more about our services.