Types of Business Entities and How They Affect You

The kind of business entity you select – whether it’s sole proprietorship, a general partnership or LLP, corporation or a limited liability company will impact your legal protection from lawsuits and business debts. It also impacts how your business’s taxes are assessed and the amount of paperwork you must submit. Your business’s entity choice will affect your capacity to obtain a small-business loan and the ease for you to draw investors.

While state government recognize more than a dozen kinds of entities, the majority of small-business owners will register as one of six: sole proprietorship general partnership, limited liability partnership or limited liability business, S corporation or C corporation. To actually establish your entity structure, you must submit the appropriate paperwork to your state agency and pay a modest fee in most states.

The type of entity you choose is one of the first major decisions to be made as a brand new business owner. The choice you make will have significant implications on your legal responsibilities and finances, which is why it’s important to consult with lawyers for business and accountants for guidance that is specific to your business.

An LLC, for instance, is a preferred entity for self-employed persons because it has both the tax – and liability-related features of a limited partnership as well as a corporation. It permits flexibility in how the company is managed and its size, the method of ownership and the types of owners or investors. It also follows pass-through taxation which means that the profits are declared as part of the members’ gross income and they are responsible for paying taxes on it.

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