Is Your Business Owned by a Business Entity? – Choosing the structure of your company is one of the first things you need to do when starting a business. In other words, you are selecting the type of business entity.
Once the business entity is chosen, there will be several implications, including legal and financial that come with it. In this way, knowing what business entity type meets your needs is important.
Is Your Business Owned by a Business Entity?
Business Entity – How Does It Work?
A business entity will help you determine what tax you need to file. Not only that but the business entity also determines what will happen to your business when it is in trouble.
Many types of business entities now protect your personal assets when your business is sued and the assets are at risk. As for the new business entities, they are formed once you fill paperwork provided by your state.
Depending on the state where you set up the business, you will be required to pay fees sometimes. Picking up a business entity is an influential decision.
In this way, you are suggested to discuss it with tax and legal professionals before deciding. You can find counselors in the Small Business Administration.
They have local offices that will provide you with useful advice to start a small business. The Small Business Administration also partners with vetted organizations that will offer you business advice at a low-cost, even for free.
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Types of Business Entity
There are many types of business entities are recognized by the state governments in the US that you can opt for. Thus, knowing their cores and how each of them will shape your business is also critical.
However, if you are about to set up a small business, the options will be limited to six. So, is your business owned by a business entity? The following guide will help you to make the best decision for the setup of your small business.
- Sole Proprietorship
If you are looking for a simple business entity, this Sole Proprietorship is an ideal option to take. This business entity is recognized as one person or a married couple acts as the sole owner of the business and becomes its operator.
You will automatically become the sole owner of your business under the low if you are the only owner of the business. In this way, it is unnecessary to register with the state for the sole proprietorship.
Those who can be a sole proprietorship are consultants, freelancers, retail store owners, and more. The sole proprietorship is easy to start with an easy tax filing.
The downside is that you will be the only one that is responsible for any debt if your business finance is at risk.
- General Partnership (GP)
At a short glare, General Partnership (GP) sounds like Sole Proprietorship. The main difference between the two entities is that GP is own by two or more people.
Just like the sole proprietorship, GP also comes with the default mode of ownerships designed for businesses with multiple owners.
In this way, just the same with the sole proprietorship, you don’t need to enroll as a GP with the state. Some pros linked to GP is that there is no paperwork or formalities required when using this business entity.
Not only that but you don’t need to take full responsibility for any financial loss in your business. Just like the profits, all financial risks of your business will also be shared with your partners. However, it is usually a bit hard for a GP to get a business loan if you haven’t registered your business.
- Limited Partnership (LP)
Unlike GP, Limited Partnership (LP) requires you to register with the state. As the name suggests, LP is a limited partnership where paperwork filing is required.
There are 2 different kinds of partners in LP. The first type of partnership is the owner, operator, and assume the liability of the company while the second one is investors or limited partners.
These limited partners have fewer liabilities and they don’t have the power to control business operations. However, compared to the owner and operator of the business, these limited partners only pay fewer taxes.
If you need finance back up to support your business, LP will be a great option to take. But, this business entity is usually more expensive if compared to GP.
C-Corporation is often considered an independent legal entity that is formed from the company owners separately. Roles as shareholders, officers, and a board of directors who control the entire operation can be fulfilled by a single person.
However, this type of business entity has more regulations. Not only that but there are a lot of tax laws that need to be complied with by the company.
Also, owners of the company don’t have personal liability related to business debts. Depending on the state where the company is built, the methods used for incorporating required forms and fees can be different from one to another.
In the S-Corporation, all profits and losses of the company pass through the personal tax returns of the owners. This is just like what you will find in a sole prop or partnership scheme.
There is also no corporate taxation level in S-Corporation. But, this business entity can be expensive like C-Corporation.
Not only that but there is also more limit related to issuing stock with this business entity. Setting up S-Corporation also requires you to comply with business formalities such as shareholder meetings, holding board, and creating bylaws.
- Limited Liability Company
Limited Liability Company (LLC) is another common type of business entity used for small businesses. LLC comes with liability protection and it allows you to choose whether you want your business to be taxed as a corporation or as a company.
This business entity will allow you to how you want the IRS to tax your company. In this way, you can tax your business as a corporation or a pass-through entity.
Also, LLC only needs a few formalities to set up, making it very popular among small business owners. However, you might find it a bit pricey if compared to a sole proprietorship and partnerships, both general and limited types.