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Choosing the right business entity

ByLandon Naumovich

This month’s Legal Brief focuses on a more complex piece of setting up a business. Choosing the correct business entity is crucial. We review the following business entities: sole proprietorship, partnership, corporation, and limited liability company.

Setting up a business can be challenging. Getting a new business venture going comes with lots of choices and decisions. One of the more complex aspects is choosing a business entity. Consequently, business entity selection is one of the most important considerations when starting a business. The business entity you chose dictates everything. Company ownership and decision making. Profit distribution. How your business handles taxes. For that reason, this the one thing you want to get right from the start.

A business entity is the legal structure a business adopts to operate and manage its affairs. The business entity chosen defines how the business is organized and how it will be treated under the law (liability, taxation, and other legal responsibilities).

Business Entity Selection

Below we discuss four common business entities. We explain how they work, describe their taxation, and show how they represent ownership.

Choose a Business entity

People commonly use sole proprietorships in America when one person owns and operates the business. Sole proprietorships are the simplest business entity. You do not need to register them through the state and can easily file taxes through your personal tax return. However, you still may need to obtain any required permits depending on your industry. The main downside of a sole proprietorship is that there is no separation between business and personal assets and liabilities. 

A partnership involves two or more people owning a business. Under this entity a business shares ownership, operation, and income between members.

There are two types of partnerships.

First is a general partnership. This is essentially the same as a sole proprietorship. However, there are two or more owners and operators sharing responsibility for liabilities and assets. Second is a limited partnership. There is one owner and operator and one or more investors in the business. Investors give up their ability to run the business, and in return business liabilities remain separate from personal assets.

Both types of partnerships share the same kind of taxation. All members involved file their own taxes for the business. 

Corporations are an advanced type of legal business entity. They can sue and be sued and borrow money more freely. Additionally, a corporation can separate their liabilities and assets from their owners and investors. Since the business pays taxes instead of owners or shareholders being taxed.

There are two different types of corporations, S and C corporations. The main difference comes in the form of stocks and taxation. For example, S corporations have much stricter rules when it comes to issuing stocks, tax write offs, and corporate rules. Because the businesses have more freedom in what they can do, they are more expensive and harder to register. Why? They require more IRS, state, and government approval and recognition.

Limited Liability Companies or LLCs are essentially a combination of the other business entities. For example, LLCs can have one owner or many. They may choose to be taxed as a corporation or a partnership. Further, LLCs can also separate assets and liabilities from the owner(s). This makes LLCs popular with medium sized businesses. A drawback of LLCs: filling can potentially be long and expensive, similar to corporations. Also, LLCs must be registered with the state and IRS, and cannot issue stock.

One challenge of starting a business is knowing ahead of time what the best options are for your business. This includes selecting the correct business entity. Simplify how you choose the right business entity and ensure you set up your business correctly from the start. Connect with an attorney at Stone Law. We listen to your goals and plans for the future and discuss what options are available. Work with you to create any documentation needed and stick with you as you grow. Avoid unexpected problems down the road. Call Stone Law today and start your business off on the right foot.

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