Types of Business Entities
Looking to Start Your Own Business?
From drafting contracts to representing your business in court, we can help. But first, make sure you know the types of business entities so that you can find the best fit for you and your business.
Things to Keep in Mind…
When you are starting a business and deciding which of the types of business entities you will choose from, keep in mind these four things:
Ease of Creation: How easy/hard would it be to create this type of corporation?
Owners’ Liability: Would you be held responsible for your business’s liabilities?
Taxes: What will taxes look like for you?
Capital: How will you acquire capital? What will you need?
There are six major types of business entities:
Sole Proprietorship
General Partnership
Limited Partnership
Limited Liability Company
C-Corporation
S-Corporation
Let’s look at the positives and negatives of each type of business entity and the basics of how they are run.
Sole Proprietorship
What is it?
A sole proprietorship is a form of business entity in which the owner is indistinguishable from the business. The business is the owner. All new, single-owner businesses are considered sole proprietorships unless the owner affirms otherwise.
This is the simplest- yet most dangerous form of corporate entity…
The Pros:
A sole proprietor pays only personal income taxes on the business’s profits.
The sole proprietor can make any decision they want concerning the business. (Sole proprietors have full control over their business.)
The Cons:
The owner has unlimited personal liability for all losses or liabilities that the business incurs. If the business goes down, so does the person.
The business is automatically dissolved when the owner dies.
When raising capital for the business, the owner is limited to only personal funds or loans that they can get. In a sole proprietorship, there may be a lot of out-of-pocket expenses that the owner is obligated to pay.
Other Things About This Type of Business Entity:
Your “pay” is just your annual profit (your sales minus your expenses at the end of the year).
You are not allowed to be on the payroll as a sole proprietor but can make a draw on profits.
General Partnership
What is it?
A general partnership is a business entity that is made up of two or more owners (or “partners”) where there is a written, oral, or implied agreement.
If there is no written agreement, UPA laws will govern the partnership.
Essentially, a general partnership just means co-ownership of a business with joint control and shared profits.
The Pros:
With a written agreement, partners have the opportunity to decide all of the rules for their company beforehand.
Decisions can be included detailing the duration (definite/indefinite), rights of partners, management rights, interest, etc.
If one partner dissociates, the partnership can still continue.
The Cons:
Partners are personally liable for debts.
Unlimited personal liability
Other Things About This Type of Business Entity:
Each partner’s income comes from a distribution of profits according to the partner’s share in the business
Each partner is entitled to the proportion of business profits and losses that is specified in the partnership agreement
Limited Partnership
What is it?
A limited partnership is very similar to a general partnership, but instead of being required to have two general partners, an LP must have at least one general partner and one limited partner.
The general partner(s) has/(have) unlimited liability, but a limited partner is only liable up to the amount of their investment.
The Pros:
Limited partners have a safe investment.
Easier to raise capital.
The Cons:
Limited partners cannot oversee/manage everyday operations
General partners are in a very risky position
A lot of documentation is required to start this business entity
Other Things About This Type of Business Entity:
LPs are very common for real estate agents, lawyers, and accounting firms to use.
Limited Liability Company
What is it?
Also called an LLC, a limited liability company is a business form in which the owners are called “members” and ownership in the business is called “interest”.
The Pros:
Members are shielded from personal liability in most scenarios.
If a member is held personally liable, any liability is limited to the number of that member’s investments
Members can oversee/manage everyday operations (if the LLC is member-managed).
LLCs are subject to pass-through taxation.
Members are not taxed on the company level — just on a personal level.
They allow foreign investors.
The Cons:
Ownership of the business is spread between people.
This means that the money is spread out too!
Piercing the corporate veil.
A judge may declare that your personal assets are not safe from the liabilities of the business.
Other Things About This Type of Business Entity:
An LLC’s profits are allocated in proportion to ownership interests.
LLCs are taxed as a partnership by default but can elect to be taxed as a corporation.
Owners are separate entities from their businesses.
C-Corporation
What is it?
A C-Corporation is a business entity in which the owners (or shareholders) are taxed separately from the corporate entity itself.
The Pros:
Shareholders have limited liability protection.
There is a separation between ownership and management.
The Cons:
Expensive and difficult to start.
Taxed both at the corporate level and personal level.
Other Things About This Type of Business Entity:
An owner may choose to be paid in dividends instead of regular payroll.
This means that they are able to avoid payroll taxes.
S-Corporation
What is it?
An S-Corporation is a type of business entity that is a closely held corporation and is taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.
A closely held corporation is a business where at least half of the stock is owned by 5 or fewer individuals.
The Pros:
Allows for pass-through taxation.
Members are not taxed on the company level — just on a personal level.
The assets of shareholders are protected.
The Cons:
Does not allow for foreign investors.
Stock ownership restrictions.
Other Things About This Type of Business Entity:
An S-Corp is one of the types of business entities that allows avoidance of double taxation while also saving on Social Security and Medicare taxes.
How We Can Help You
If you’re ready to get your business started, we can help with that. Contact Wadkins & Wallace today by calling (706) 221-9451 or by filling out our online form.
