Types of Business Entities and How They Affect You

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The kind of business entity you choose to use – whether a sole proprietorship, general partnership or LLP, corporation or a limited liability corporation – will affect your legal protection from lawsuits and business debts. It also determines how your business will be taxed and the amount of paperwork you have to submit. And, your business entity choice will affect your ability to obtain a small-business loan and how easy it is for you to attract investors.

Although state governments recognize more than dozen kinds of entities, most small-business owners register as one of six types: sole proprietorship general partnership, limited liability partnership and limited liability company. S corporation or C corporation. In the majority of states, you’ll need to pay a small fee and submit the required paperwork at the state agency you are registered with to establish your entity structure.

The type of entity you select is among the first major decisions that will be made when you’re a new business owner. This decision can be a significant influence on your legal and financial exposure, so you must consult with a business lawyer and accountant to get advice that is specific to your specific business.

For instance, an LLC is a very popular choice for self-employed individuals because it offers both the tax and liability features of a limited partnership as well as a corporation. It is flexible in the way the company is run, its size, method of ownership, as well as the kinds of investors or owners. It also follows taxation through pass-through which means that the profits are reported as part of the members’ gross income and they are accountable to pay taxes on it.

types of business entities