The Different Types of Entities for Business Formation

Going out on your own and starting your own business is both a thrilling endeavor and a terrifying experience. Your attention is necessarily focused on your field of expertise and your mission, but you also need to cross all the Ts and dot all the Is of business formation. There are four major organizational forms from which you can select, and the one that you choose will have an impact on your personal liability your tax liability. These issues can be complex, but an experienced business formation attorney can provide you with the guidance you need to make the right choice.

The four types of organizations, sole proprietorship, partnership, corporations and limited liability companies, each have their own benefits as well as drawbacks. These are best understood by examining each individually and comparing their attributes to your specific needs.

  • Sole proprietorship – These are businesses owned by a single person. They do not register with the state and their business operations are relatively simple. Sole proprietors’ profits and losses are reported directly on the owner’s personal tax return, and the owners are personally liable for business debts and legal judgments.
  • Partnerships – There are two types of partnerships: general and limited. In general partnerships, two or more people act as co-owners, with each taking part in the daily business operations and each liable for the business’ liabilities. Profits and losses are reported on individual tax returns. By contrast, in a limited partnership, at least one partner (general) takes part in daily business operations and at least one partner (limited) contributes the money behind the business but does not play as large a role in running the company. When it comes to liability, the limited partner is only liable for as much as they contributed, while the general partner is personally liable for the liabilities and debts.
  • Corporations – This type of business entity is legally separate from its owners and provide protection against liabilities. The corporation has many of the same legal rights as a person, including the ability to be involved in contracts and borrow money. It also is responsible for paying its own taxes. Owners’ liabilities are limited to their investment in the company.
  • Limited Liability Company (LLC) – This type of entity can involve a single person or multiple owners. The owners (or members) liabilities are limited to their investment in the company, though the company is not a separate taxable entity.

The business formation decision is one of the most important that you will make as a business owner. For legal guidance, contact our office to set up a consultation.