Before starting a business, we need to understand how a typical business runs. One of the key concepts to understand is the business entities. It is how your business would be organized and controlled with your desired business structure, from which it will be determined whether you want it to be run by yourself alone, or with the cooperation of several partners.
Each business entity has its peak and downfall so it is indeed essential for us to grasp what are the factors that we should consider. Legal and financial implications, for instance, are two key concepts to talk about. For you to further understand the five main types of business entities: sole proprietorship, general partnership, limited liability company (LLC), C-corporation, and an S-corporation, check this guide out before starting a business:
Types of Business Entities and its Pros and Cons
Limited Liability Company (LLC)
LLC is a type of legally-recognized business company. Meaning, it is a business operation that secures personal liability security from any debt, tax claims, lawsuits, bankruptcy, and other potential business negligence issues.
Since LLC is a business structure that is solely allowed by the state, regulations would be different from one state to another. If you are an entrepreneur, for example, in the state of Nebraska, the Nebraska LLC cost for electronic filing of Certificate of Organization is 100 dollars and additional fees may apply. Compliance with the legal policies of the state is one of the initial steps to building an LLC business type.
- Control and flexibility to general partnerships or sole proprietorship despite personal liability protection
- Allows flow-through taxation
- Isolates individual owners from the business’s liabilities
- Permits one to an unlimited number of owners from which not requires too much legal documentations
- Gives freedom to entity members to select their taxation method
- Compliance and state renewal fees could be expensive
- Business operations could be difficult for investors to contribute capital
It is a type of individually-run establishment from which the owner sells a service or product without building entity status with the state.
- Ideal to start working with yourself at any moment without arranging regional tax documents or state forms for dues and fees
- Both able to accept contracts and bids under your name or as a business
- Does not require a board of directors and annual meetings by operating the business independently
- The business’s legal and financial situates to your personal ones (i.e. business bankruptcy means personal financial distress, likewise to lawsuits)
- The higher the business profit, the higher the self-employment and pay income taxes to pay
Offering the same ease with sole proprietorship but, it is now with the other people’s partnership. Primarily, a general partnership has the resemblant operating structure with the sole proprietorship.
- Ability to distribute start-up costs, workload, and other responsibilities with the partners
- Shared or dispensed business expenses and risks
- The combining of skills enables a higher potential for financial achievement
- Partners can mutually motivate each other
- Not having full control to the business
- Each one requires a skill that would lead to business success
- Small and huge decisions may vary from each of the partners
- Personal’s legal and financial situation is also the same as the business
A type of legal business entity that can protect the shareholders or owners from personal liability and company debt.
- Security of the owner and shareholder’s legal risks from the business
- Taxation deductions can be applied
- Potential business entity for attracting venture capitalists
- Governing bodies are required to abide by the corporate by-laws
- Complex stock distribution and tax forms
- Vulnerability to double-taxation
Just like C corporation, this business entity allows owners to receive an identical corporate veil of liability assurance and own stock. Likewise, it demands an election for the board of directors for structural operations.
- Assurance with the legal risks of the shareholders to the business
- Eludes double-taxation
- The potential attraction of investors to further transfer corporate stocks
- Shareholders are ordered to arrange and sustain lots of federal and state documents
- They can only use one class of stock
Business owners can choose the business entity that would fit their interests and assets. From knowing these, you can start your business from general partnerships up to LLC business entities.
- Pros and Cons of Financing a Business
- Choosing the Legal Structure of Your Business
- What is a Partnership: Types of Partnerships?
- What is a Limited Liability Company (LLC)?
- When to Change Your Legal Structure