When starting a business, one of the most important decisions you will make is choosing a type of business entity. Your choice will have legal, financial, and tax implications for your company, so it is crucial to understand the different types of business entities available. Here are some of the most common options.
Sole Proprietorship
A sole proprietorship is the simplest and most common form of business entity. It is owned and operated by one person and does not require any formal legal documentation or registration. The owner has unlimited liability for business debts and is personally responsible for any legal issues. However, the owner also receives all the profits and has full control over the business. Usually, this is the least expensive type of business entity to start up.
Partnership
A partnership is similar to a sole proprietorship, but it involves two or more people sharing ownership and control of the business. There are two types of partnerships: general and limited. In a general partnership, all partners have equal control and are jointly and severally liable for business debts. In a limited partnership, one or more partners have limited liability and do not participate in the day-to-day management of the business.
Limited Liability Company (LLC)
An LLC is a hybrid business entity that combines the benefits of a corporation and a partnership. It provides the limited liability of a corporation while allowing its members to enjoy the tax benefits of a partnership. An LLC can have one or more members who are not personally liable for the company’s debts. However, they must file articles of organization with the state in which the company operates and pay annual fees.
Corporation
A corporation is a separate legal entity from its owners. It can issue stock and raise capital by selling shares to investors. It also provides limited liability protection to its shareholders, which means they are not personally responsible for the company’s debts. However, corporations are subject to double taxation, which means the company’s profits are taxed at the corporate level, and then again when they are distributed to shareholders as dividends.
S Corporation
An S corporation is a type of corporation that is taxed as a pass-through entity. The company’s profits and losses are passed through to the shareholders, who report them on their personal tax returns. S corporations can have up to 100 shareholders and they must meet certain eligibility requirements, such as being a U.S. citizen or resident and having only one class of stock.
Consult with a Financial Professional
Choosing the right type of business entity for your specific enterprise can be challenging since each type of entity offers various advantages as well as disadvantages. Some of these features may be legal in nature however in many ways choosing the right business entity is a financial decision as well. There may be some types of entities that make more fiscal sense for your specific business. Talking with a financial expert professional can help you sort out the options and land on the best type of business entity for you. Contact us at Waller and Wax for options on managing your current and future financial assets.