If you’re reading this, we can tell you’re an ambitious entrepreneur eager to start their company. You’ve come up with the blueprint, scraped together the funds, and are now ready to launch your startup.
But, have you thought about the right legal structure?
When you start your business, you want to find the right legal structure to set it up. There are different types of business entities, and it’s imperative that you choose the right one for your company.
So how do you choose the right type of business entity for your company?
This guide will show you the types of business entities and how to decide which is best for your situation.
Under the law, you are a sole proprietor if you are the sole owner of the company. If you start your business and you are the only owner and operator, this gets classified as a sole proprietorship.
This type of business doesn’t need any legal incorporation. You don’t have to file separate tax returns for a sole proprietorship. Your personal income and business income get consolidated. As a result, opening a business bank account is also unnecessary.
This is often used by freelancers, solopreneurs, or even sole operators of retail businesses.
One disadvantage of this business entity is that your personal assets aren’t separate from your business assets. If you lose a lawsuit, you might have to give up your personal assets including money, your car, and your property.
This is a type of business entity that isn’t controlled by the company owners. This primary control gets exercised by shareholders, a Board of Directors, and business officers.
You can have one person to fulfill all these roles if you choose. As a result, you can fulfill all these rules and have complete control over your business.
With this type of business entity, you can offer shares of your business. This is a great way to raise funds for future endeavors. You are also eligible for more tax credits and deductions than other types of companies.
The major drawback is that this structure requires more compliance with laws and regulations. For example, you would have to hold board and shareholder meetings. You also have to prepare company bylaws before setting up this structure.
There are several S Corporations advantages. This makes it one of the most attractive business structures.
It has the same limited liability advantage that a C-Corporation has. The taxation gets handled by the owner of the S-Corporation. As a result, there is no corporate tax or double taxation.
For entrepreneurs who would otherwise be sole proprietors, this is one of the best options available. It offers the protection that sole proprietorship doesn’t. This is without having to get into the hassle of compliance that a C-Corporation requires.
Limited Liability Company
Abbreviated as LLC, this is one of the most popular business structures for small businesses. This business entity has few liabilities. This makes it great for protecting your business from potential lawsuits.
There’s also less paperwork, compliance, and other obligations. In many ways, an LLC has the ease of a sole proprietorship. You don’t have to worry about merging personal assets with business assets.
You can choose if you want your LLC should get taxed as a corporation or partnership. It does require an incorporation fee and minimal paperwork. Yet this remains a favorite among small business owners across industries.
There are two types of Partnerships — General Partnership (GP) and Limited Partnership (LP).
A GP is the standard structure for a business that has multiple owners. Like a sole proprietorship, this doesn’t require any legal incorporation. You won’t need to go through any formalities, except for licensing and permits required by particular industries. You and your partners can sort out how to split profits, losses, and expenses.
In this type of business entity, each business owner is responsible for any liability associated with the company. If one owner gets deemed to be negligent, they might have to incur more liabilities than the other owners.
An LP must get registered as a legal entity. In an LP, different partners have specific roles. These roles get outlined in the business structure’s paperwork. For example, one business partner might be responsible for operations. Another business owner might be in charge of raising capital.
In an LP, one partner can leave at any time without closing the business. If one partner oversteps their privileges (even inadvertently) they might be held liable by the other partners.
Choosing Among Types of Business Entities
So how do you choose which is the best type of business entity for your company?
Where possible, you should always seek the professional advice of a business attorney. They can advise you on what’s best for your business plan. They will also understand the obligations of each business structure better than a layman.
You have to consider your tolerance for risk and compliance. For example, if you have a low compliance tolerance, you might like a Sole Proprietorship or General Partnership. But if you choose either of these structures, you risk losing your personal assets in the event of a lawsuit.
If you wish to raise money for your company and make it public, you want to choose a C-Corporation. But you should ask yourself if all of the compliance is worth the effort. Are you willing to take on the responsibility of shareholder and director? If not, do you know how to vet shareholders and directors?
You might like an LLC because of its minimal requirements and great protections. If you start as a Sole Proprietorship or General Partnership, you might want to set a date as to when you would upgrade to an LLC or other business structure.
Start Your Business Today
Now that you know the types of business entities, you can choose which works best for your company. Make sure to share this guide with your fellow entrepreneurs.
If you want more tips on entrepreneurship and running a business, check out the other great articles on our website!