There are a few different types of business structures. Each business structure offers certain advantages and disadvantages in legal control, taxes, and liability. If you are creating a business, be familiar with the advantages and disadvantages of the entity you are utilizing.
Also known as Sole Traders. Sole proprietorships are owned by an single individual, who takes on all the risks of business, including debt and legal liability. There is no legal distinction between the sole proprietor and the business the proprietor owns. The sole proprietor also maintains full control over the business and takes in all the profit after expenses.
A corporation is a legal entity distinct and apart from the corporation’s owners. Shareholders are the owners of the corporation, while officers and directors are responsible for its management. A corporation may enter into contracts, sell and buy property, and be sued. Corporations can only be created by adhering to strict guidelines imposed by state laws. The guidelines are defined by each state’s statutes that cover corporate governance. The shareholders of a corporation are not responsible, in most instances for the corporate debt.
Corporations can be divided into two types: C corporations and S corporations. The main distinction between the two types is that C corporations are taxed separately from their owners while S corporations are not. Instead, the owners pay for the corporation’s taxes on an individual basis. S corporations are subject to eligibility requirements which C corporations are exempt from. Such requirements include:
- Number of shareholders
- Classes of stock
- Residency status of the shareholders
A Limited Liability Company (LLC) is generally defined as a business entity consisting of one or more persons. An LLC, like a corporation, has limited liability under the law. However, limited liability companies are not held to the same strict management requirements as corporations are. Limited liability companies consist of managers, members, and, often, employees. LLCs, like corporations, are separate legal entities from their owners. They also have a choice in taxation structure; LLCs can choose to file taxes as corporations or partnerships. An LLC’s structure is usually less defined then a corporation, making investors wary of supporting them too much.
- General Partnership: A general partnership consists of two or more partners who come together to operate a business. A partnership can be formed with or without an agreement. All partners share the profits, debts and liabilities of the partnership and can be held personally liable for debts and liabilities.
- Limited Partnership: A limited partnership consists of one or more limited partners and one or more general partners. The role of the general partners is to make the management decisions of the business, while that of the limited partners is limited to invest capital. All of the risk is assumed by the general partners, who also assume all debts and any liabilities and of the limited partnership. Conversely, the limited partners only risk their financial contribution. In most cases, all partners in a limited partnership share the profits of the business.
- Limited Liability Partnership: A limited liability partnership (LLP) is a partnership with limited liability for all partners that some states reserve for certain professions. Partners in an LLP are shielded from liability for the negligence or misconduct of the other partners.
Choosing an entity for your business can be a challenging task given the various options. If you are looking to create a business or change the form of your business entity, consider consulting an attorney. A corporate lawyer can help you evaluate your options.