Types of Business Entities: Everything You Need to Know
Different types of business entities have varying business structures and include LLC, limited liability partnership, partnership, sole proprietorship, corporation, and nonprofit.4 min read
What Are the Different Types of Business Entities?
Different types of business entities have varying business structures and include LLC, limited liability partnership, partnership, sole proprietorship, corporation, and nonprofit. The type of corporation you choose depends on several factors. The following are the different types of business entities and what they each entail.
Limited Liability Companies (LLCs)
Limited Liability companies act as independent entities from the owners and aid in dividing personal and business assets and debts. It is a mix between a corporation and a partnership.
LLCs are taxed in the same manner as a sole proprietorship if there is one owner and taxed as a partnership if there are multiple members. Owners are also protected against any liabilities or judgments against the LLC. Profits and losses are also divided between owners. For example, an owner who has a 10 percent share can be given 40 percent of the profits.
Flexibility and Limitations
An LLC allows members to customize their business. Further, there is no limit in the number of co-owners. Also, an LLC may only have one owner and can maximize the benefits of a sole proprietorship with limited liability. Owners are not required to conduct yearly meetings and record the meeting itself.
On the other hand, there are limitations in the form of limited member liability. First, an LLC requires an operating agreement outlining the structure of the organization. Consult a lawyer to determine the best organization structure for your business.
Limited Liability Partnership
A limited liability partnerships yields the same benefits as an LLC and is normally associated with such fields as accounting, law, or medicine. For instance, partners would not be held liable for any malpractice from other partners. Partners would also absorb any share and losses through their individual income taxes.
When it comes to taxation, partnerships allow individual members to deduct income and deductions according to their partnership or ownership shares. With that, partnerships are liable for any lawsuits and judgments against the company.
There are no requirements to create a partnership, and they are easy to operate.
General partnerships are agreements between two or more individuals in pursuit of profit, and there are no fees associated with creation of the organization. General partnerships allow for more support and creative decision making.
Each member absorbs all profits and liabilities for the business, and each one contributes something in the form of labor, skill or financial resources to the venture. Owners can also report any net businesses losses on their income taxes.
General partners can also raise money without giving up a portion of their control in the business.
Limited partnerships provide limited personal liability against any debts absorbed on the amount of money they put into the organization. LPs attract many investors because they are only responsible for their portion of the business. Each partner must file with state authorities to be granted limited status. Limited partners can also exit the organization with no need to dissolve the partnership itself.
Sole proprietorships are the simplest business structure, and it can be dissolved with the most ease. Sole-proprietors are also known as consultants, freelancers or independent contractors.
This is a business run by one individual for his or her own benefit. This form of ownership is operated by a lone individual for his or her own gain and does not exist outside of the owner. The owner is also liable even if he or she only invests a portion of their money into the business. Any liabilities from the business falls upon the owner, and the organization itself ceases to exist if the owner dies.
There are also few procedures to form a sole proprietorship, with minimal fees for creation of the organization. There are also no forms to fill out. In addition, owners are free to deduct a net business loss or gains on their income taxes. Sole-proprietorships are also known as single-member LLCs and are taxed on Schedule C of your taxes.
A corporation is a legal organization that operates under state law and is governed by its charter. C Corporations usually come with an “Inc.” at the end of the company name, and it is the most common kind of corporate entity. Owners are also protected in a limited fashion from any debts or judgments, and they are not held accountable for the actions of other owners.
An articles of incorporation document must also be filed with authorities to create a corporation. Stockholders are safeguarded from any liability, and stockholders/employees can take advantage of certain benefits, including health insurance. Other benefits include tax deductions.
Further, owners and the business can pay lower taxes by porting profits among each member.
C Corporations are independent legal and tax entities from owners, and there is no limit in the amount of shareholders. C status also distinguishes your business debts and personal assets. C Corporations are doubly taxed on dividends and business profits.
Under law, they are required to hold yearly meetings while recording meeting minutes.
Small Business Corporation (S Corporation)
S Corporations are created solely for smaller companies to gain tax advantages, provided IRS codes are satisfied. They operate in the same manner as a C Corporation, but face the same amount of taxation as a partnership.
S Corporations have limited protections, but have full control over profit amounts to members. For S Corporations, you must have at least a single shareholder but not over 100. S-based owners also enjoy a certain amount of liability protection against debts or judgments.
Net income is calculated as income for the shareholder, despite a shareholder's right to keep all or a portion of net income. Further, owners can share net profits while offsetting income by reporting as a loss on income taxes. S Corporations can also avoid double taxation if owners report on their income tax returns.
Nonprofit corporations do not pay income taxes on any money received for charity causes. Donors can also deduct any donations from personal income taxes. Also, nonprofits usually enjoy exempt status when it comes to state and federal taxation, also known as “exempt organizations.”
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