A business entity refers to an organization that is created either by an individual or a group of people intending to engage in a particular trade. There are several types of businesses, including sole proprietorships, Limited Liability Companies, Partnerships, and corporations, or of which are distinguished by the overall structure of the organization.
When starting any business, one is required to decide the structure of their company, or in other words, choose the type of business entity. The decision made, in this case, has both legal and financial effects on your business, thus you have to be very careful as to which choice you make.
Most governments recognize quite a number of types of business entities, though most people end up choosing either of the following: S-corporation, Limited Liability Company, Limited partnership, Inc, sole proprietorship, and general partnership.
Sole proprietorship
This is a business entity that is run by one person, or by a married couple, as both the owner and operator of the entity. This is the perfect choice for those who are trying to launch a new business and would want to have legal documents to prove that the entity exists. Anyone from a freelancer, to a consultant and simple baker, can work as sole proprietors, since such entities are easy to start, and do not have corporate formalities such.
Incorporated company (Inc)
Incorporated companies or corporations are the legal entities that result from the separation of a business’ assets and income from that of its investors or owners. Corporations usually function separately from the owners and shareholders, hence if one has an issue with the product or service offerings, they are to sue the business entity and not its owners or investors. If limited liability is the main factor that you are thinking about, then this is a good option for you. Limited liability offers sufficient protection from creditors, to the extent that they cannot collect your personal assets if you fail to pay their debt. Corporations, however, attract higher filing fees.
S-Corp
These happen to be a unique type of corporation that offers their owners pass-through taxation. This means that the businesses’ profits are usually passed to their owners’ personal income, without them being subject to the set corporate tax. The government usually treats S-Corps like sole proprietorships, though they cannot have more than 100 at the same time. In the USA, these shareholders must all be US citizens.
General Partnerships
Partnerships have quite a number of similarities with sole proprietorships. The main difference, however, is that partnerships must have two or more owners. General partnerships are structured in such a way that all the partners are required to actively manage the business, and to also share in the profits and losses. This is, therefore, a good choice for those who want to co-own and co-run a business if they are not spouses. The good thing is that the partners do not have to register their general partnership with the state government, hence can get started with their business right away.
Limited Partnership
A limited partnership is a type of business entity, which unlike the general partnership, has to be registered with the state government. In a Limited Partnership, the partners must file all the needed paperwork at the time of formation of the entity. Limited partners have fewer liabilities, and they usually act as investors in the underlying business. Since this entity allows for the inclusion of investors in the business, it is a good option for those who are interested in growing their businesses through the financial help offered by the investors. Note that the investors act as limited partners or silent partners as they are popularly referred to.