What Type Of Business Entity Should You Choose?
The type of business entity a business owner chooses is essential. This important decision will determine and impact many aspects of the business, including which documents to file for taxes and whether a business is eligible for specific tax breaks. Deciding which type of business entity is right for your company will depend on the various forms of activities the business will conduct. The first step in choosing the best entity for your unique situation is to review the state and federal laws and analyze your business’s goals. Once you collect all of this information, you can find the best legal and financial structure for your company. If you would like help deciding which types of business or entities would be best for you, contact a knowledgeable attorney at Polymath Legal PC at 833-931-6418.
The Types of Business Entities Overview
There are various types of business entities a new owner or group of owners can establish. There are four major entity structures. Crucial things to consider when starting a business and making a decision regarding the type of business entity to choose include:
- How the business will pay taxes
- The size of the company and number of employees
- How business owners will share the profits
- The degree of ownership and accountability for each owner
- Monetary and other funding options
- Each entity owner’s liability
The most common types of business entities are listed below:
Sole Proprietorship
A sole proprietorship is a business that one person owns and runs independently. It is the simplest type of business to open, as the owner does not have to register or incorporate the business. Federal and state statutes do not distinguish between the company and the business owner, which means that the business owner is personally liable for the actions and financial obligations of the company. A sole proprietorship is the simplest and most common way owners open new businesses. There are no actions the business owner must take as long as they are the sole owner. The status is automatic upon the owner completing business activities.
Partnership
A partnership entity is a business relationship between two or more people who share the profits. Each party contributes in some way to the business. Further, the partners share the legal and/or financial responsibility and share in the profits and/or losses of the business. There are several types of partnerships the company owners may choose to establish. There are partnerships where all partners share profits and liabilities equally. New business owners may also select to operate as a limited liability partnership (LLP). Some business owners choose to operate with a silent partner where that person does not participate in daily operations.
Corporation
A corporation is a legal entity or organization that a group of business owners or stakeholders can establish to act as a single entity through its state of incorporation laws. The corporation is distinct and separate from the business owners. Each state or demographic the business operates in has the power to enact laws regarding each corporation’s opening, handling, and dissolution.
According to California Corporations Code Section 200-213, a partnership, person, association, or domestic or foreign entity may form a corporation under state law. Unless there are under three shareholders within the corporation, there must be no less than three directors for each corporation.
S Corporation
An S Corporation or S Subchapter is an entity that elects to pass the corporation’s losses, deductions, credits, and income through the corporation’s shareholders for federal tax purposes. The corporation must meet specific Internal Revenue Code requirements to qualify. To qualify under this structure, the entity must meet the following criteria:
- The entity must be a domestic corporation.
- The business must have less than 100 shareholders.
- The company must have only one class of stock.
- They cannot be an ineligible corporation, such as an insurance company or bank.
- The businesses may not be partnerships, corporations, or non-resident shareholders.
Limited Liability Company (LLC)
According to the Internal Revenue Service, state statute allows businesses to structure as a Limited Liability Company. Every state operates under different legislation, so future business owners should check regulations and rules within the region the new business will conduct for requirements. Individuals, corporations, foreign entities, and other Limited Liability Companies may operate these businesses, and the laws refer to them as members. This structure protects business owners from specific faults and responsibilities that relate to the business. Therefore, some entities, such as insurance companies and banks, do not qualify to operate under this structure. There are also additional regulations for foreign Limited Liability Companies.
Non-Profit Corporation
A non-profit corporation is a unique form of business that does not operate under an owner. They conduct business for charitable, educational, scientific, religious, or literary purposes. Entities that qualify under the law receive benefits. One benefit includes tax breaks. Non-profit corporations are eligible for tax benefits and breaks because the company operates for purposes other than profits for its business owners.
Comparison of Business Entities
There are various business structures business owners must choose from when launching a new business. When individuals choose which entity to operate under, they must compare each structure’s positive and negative aspects. If the business owner wants primary company control, a sole proprietorship may be the best option. If the owner or owners of a company plan to have a board of directors to make the critical business decisions, they may decide to establish the business as a corporation. Each entity has many differences and variations, so new business owners must research them extensively. Other important factors include the company’s future growth, how the business owner will raise capital, and whether they envision the company to run for many years to come.
Contact an Experienced Lawyer to Discuss Which Business Entity is Right for Your Business
Whether you are starting as a new entrepreneur, or your business is expanding, choosing the correct legal structure to operate your business is essential. Before deciding, you must ensure you understand the differences in each legal entity. For more information to help you determine which types of business entities would be best for you, contact a knowledgeable attorney at Polymath Legal PC at 833-931-6418.