World Executives Digest | Out of all the decisions an entrepreneur has to make when setting up a new business venture, one of the first and most important ones is deciding what kind of entity you wish to set up. The choice you make is likely to have a significant impact on the running of your business – it will affect your tax liability, the process and paperwork required to set up your business and your ability to secure business loans or attract funds from investors. Not only that, if your company faces any legal charges or goes into liquidation, the business entity you choose determines your liability and risk exposure.
There are various types of business entities in the US that a new business owner can choose from, and in this article, you will find each kind of business owner-ship explained and how to determine your company’s best fit. It will help make your decision easier!
- Sole proprietorships
The simplest type of business entity, a sole proprietorship is owned and operated by a single individual. There is no legal requirement to register the business with the state and hence no paperwork or business formalities to comply with, although local licenses or business permits may be compulsory for specific industries. Because they are so easy to launch, sole proprietorships are the most common business structure in the US for small businesses.
Filing tax returns is done by attaching a profit/loss statement to the individual’s tax returns. However, if the business is unregistered, securing loans and raising money is quite tricky. The owner is also personally liable for the debts of his business.
A partnership is a business jointly owned by two or more people, which consists of mainly two types.
- General partnerships: This type of business structure involves dividing managerial duties and liabilities equally amongst the partners. Every partner contributes to the business in terms of their time and skills as well as capital for the company and gets a share of profit and loss in return. Additionally, all the partners are responsible for the actions of the other partners and personally liable for the debts of the business. There is no need to register a general partnership.
- Limited partnerships: Under this structure, at least one partner is a ‘general partner’ with unlimited liability whereas the other partners may have limited liability – they are only liable for the partnership’s debts up to the amount of their investment in the business and also have limited managerial input, as a result. The limited version of this scope does not require any registration with the state after filing the necessary paperwork.
- Limited Liability Companies (LLC)
A limited liability company is a hybrid business structure where owners benefit from limited liability as well as the freedom to decide whether they want to be involved in the management of the business or not. There’s also the option to determine how you want your business to be taxed – like a corporation or partnership. The owners of an LLC are referred to as members and can be individuals or even entities.
LLCs operates in two ways:
- Member-managed LLCs: All members are equally involved in the management of the business.
- Manager-managed LLCs: A few members might manage the business or outsiders hired to do the job. The outsiders act as agents of the members and are expected to lead the company for their benefit.
The main benefit of this business structure is that the owners are not personally responsible for the debts of the business – the LLC is responsible for its obligations. There are also fewer regulations to comply with, compared to a corporation.
A corporation is a separate legal entity that has legal rights of its own – it can be sued and has the right to charge third parties too. It can own property in its name and sell it, and it can also sell its ownership through stocks as well. Corporations are ideal for businesses that wish to operate by selling their shares to the general public and gain access to a large amount of investment capital.
There are two main types of corporations:
- C-corporations: Under this structure, owners benefit from limited personal liability as the business is responsible for its debts, and the company benefits from the option to raise funds by selling a stock, whenever the business needs funds. However, start-up costs are high, and there are strict regulations to comply with, such as the need to hold regular board meetings and record meeting minutes, to name a few. C-corporations are also taxed twice – first, the business pays tax on its profits, and then the shareholders pay taxes on their dividends.
- S-corporations: These are similar to C-corporations in their start-up costs and procedures and the need to comply with various regulations. Owners have limited liability as well. However, there are no corporate taxes for S-corporations, but the individuals are required to fill for file returns based on their profits.
To sum up, there are several reputed business entities that you can choose from when starting your own business. There is no one size fits all that approach that works for every new venture. You need to think about which option will suit your business now and in the future and decide accordingly.