Congratulations! You’ve decided to launch your own business. As you encounter these critical steps to officially starting your dream business, it is essential to understand business entities. A business entity is an organization formed by individuals to conduct business. There are five primary types of business entities, all of which operate in various methods. The five types include sole proprietorships, general partnerships, LLCs, C Corporations, and S Corporations. We will discuss these business entities to provide an increased understanding and awareness of what they are and how they work.
Sole Proprietorship
A sole proprietorship is any business operated by a single owner with total control and authority over how that business is run and what occurs within the establishment. Sole proprietorships are the most common type of business since they are relatively easy to operate and make decisions due to a lack of government involvement. Sole proprietorship business owners pay personal income tax using the profits they earn.
General Partnership
A general partnership is a business entity that operates under two or more people who split responsibilities and decisions regarding their company. General partnerships are not legal business entities and therefore do not require registration with the state. However, owners of general partnerships must agree to split profits and accept losses equally together. Like sole proprietorships, they are generally easy to start up and operate. They are also usually far less expensive than large corporations.
LLC
LLC stands for a Limited Liability Company. Like partnerships, LLCs operate under multiple people. The formation of an LLC helps protect business owners from liabilities that result from the company, such as bank debt. If you want to avoid debt and gain a sense of security going into business, then an LCC is your ideal direction. LLC owners have not only the flexibility to free themselves from liability, but the freedom to determine how tax costs will be split.
C Corporation
Unlike the above business entities, a C Corporation acts as a legal entity separate from its business owners. C Corporations are owned by shareholders, and shares are issued after the business is officially registered. The main difference between other business entities and C Corporations is how they are taxed. Since they are a business structure, they are treated as such rather than individuals. Therefore, they are taxed entirely separately from the business’s owners. Although corporations are generally more costly to start than other businesses, they offer the highest protection to their business owners from liability. C Corporations are the most common type of corporation in the U.S.
S Corporation
In contrast with C Corporations, S Corporations pass corporate credits, losses, and income through their shareholders instead of handling them through a separate business entity. This is usually conducted for tax purposes. There are a few crucial guidelines for running an S Corporation: a maximum of 100 shareholders working, shareholders must be legal citizens of the U.S, and they can only offer common stock. S Corporations are usually difficult and expensive to establish since they must first be established as a C Corporation. However, they do offer liability protection.
It is critical to fully comprehend these business entities to decide which is best suited for you.
