What Is a Business Entity?

A business entity is a corporation established separately from an individual for tax and operating purposes.

Business Entity Types

Choosing the right type of firm or company for your new enterprise helps maximize your chance of monetary and operational success. The most popular types of business entities are:

  • Sole Proprietorship
  • Partnerships: General and Limited
  • Limited Liability Company (LLC)
  • Corporation
  • S Corporation

Benefits and Drawbacks of Different Types of Business Entities

The kind of enterprise structure you select will depend on a number of factors, together with the character of the workforce inside your group and the objective of the business.

Sole Proprietorship

Sole proprietorship is an enterprise run by one specific person for his or her personal profit. The proprietor assumes the risks of the enterprise to the extent of his/her belongings, whether or not used within the enterprise or personally owned. Sole proprietors include skilled individuals, service suppliers, and retailers who are in business for themselves. Though a sole proprietorship isn't a separate legal entity from its proprietor, it's a separate entity for accounting functions. In sole proprietorships, the business can be terminated at the will of the proprietor.

In sole proprietorships, the proprietor is really the boss, making all the choices, keeping all earnings, and assuming the responsibility for all losses and money owed. It's difficult to boost capital in a sole proprietorship – this is usually a downside since a person's resources are sometimes lower than the pooled resources of partners or investors. In sole proprietorships, the proprietor is personally liable for lawsuits filed in opposition to the enterprise. There are no state filings required for sole proprietorships.

Sole proprietorships are straightforward in type and function. In sole proprietorships, the proprietor records revenue and loss on their private tax return.

Partnerships: General and Limited

A common partnership is a contract, expressed or implied, between two or more individuals who are part of a group. Every partner contributes cash, property, labor, or work; everyone shares the earnings and losses of the business; and everyone has a limitless private legal responsibility for the money owed for the enterprise.

Restricted partnerships restrict the private legal responsibility of particular individuals for the money the enterprise owes to the amount they've invested. Partners should file a certificate of restricted partnership with state authorities. There may be larger potential capital availability in partnerships, and the partners are personally responsible for lawsuits filed against the business.

Limited Liability Company (LLC)

An LLC is a hybrid between a partnership and a company. Members of an LLC have operational flexibility and earnings advantages just like a partnership, but they have limited legal responsibility. In LLCs, the enterprise earnings and losses will be distributed to the partners through totally different avenues than simply possession (for instance, a 10 percent owner could also be allotted 30 percent of the business earnings).

LLCs are taxed the same as a sole proprietorship (if one proprietor) or a partnership (if a number of members). LLCs don't have any restrictions on the types of partners involved, and they are usually not required to hold annual conferences or report minutes. LLCs are ruled by working agreements.

Corporation

A corporation is an authorized entity working under state regulation whose scope of business operations and identity are restricted by its articles of incorporation. Articles of incorporation should be filed with your state to become a corporation. If your business operations are in Delaware, for example, then you would file for a name and incorporation with Delaware. Stockholders are protected against legal responsibility, and stockholders who are staff could possibly benefit from some tax-free advantages, such as medical insurance. Common companies have paperwork that should be filed with the secretary of state.

S Corporation

Subchapter S corporations are particular closed firms (limits exist on the variety of members) created to supply small firms with a tax benefit if IRS Code requirements are met. Some advantages of S corporations are solely given to owners that have greater than 2 percent of the enterprise's shares. S corporations have impartial legal and tax structures separate from their owners. S corporations keep private belongings separate from business assets in cases where the company is responsible for debts. In S corporations, the partners report their share of revenue and loss within the firm on their private tax returns.

If you need help with setting up a business entity, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.