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Business Startup
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Starting Your Business -
Incorporating
Learn
the Differences Between Each Legal Business Entity Type
By:
Darrel Giann
Your individual state will
register your legal business entity, and it's important to understand that not
all states recognize every business entity type. The descriptions below are
meant to give you a basic understanding of the differences between entities, but
you should check with your local government to see which type of business
designation is right for your new venture.
Sole Proprietorships
Most small businesses choose
the legal business entity of a "sole proprietorship", where one person is the
only "owner" of the business. Legally, there is no difference between you and
your business, and while this business entity type is preferred by some because
of the ease in setting it up and registering it, there is a greater legal risk
assumed by the owner of a sole proprietorship. For example, if someone sues your
business for infringement or fraud, they will be suing you, and your
personal assets will be on the line if the case is taken to court - a
disadvantage to this kind of legal business entity. This type of situation is
rare to be sure, but from a business standpoint, it has the potential to be a
risky move.
An advantage of this entity
is the fact that you're the only owner! You can make your own business decisions
without having to consider the opinions of a board of directors, or other
stakeholders. You receive 100% of the income from your business, and are free to
file your profit on your individual tax return at the end of the year - a huge
advantage to choosing this legal business entity type.
Partnerships
As the name implies, a
partnership is an entity in which two or more people own a business together.
Just like a sole proprietorship, there is no legal difference between the owners
/ members of a partnership and the business itself. As previously stated,
choosing this legal business entity can have potentially negative consequences
if someone were to file a suit against you or your business. An entity type of
this sort carries an additional risk because of the added element of another
person. For example, let's say your business partner did something illegal and
the court has decided to penalize your business assets because of his or her
mistake. Although you have done nothing wrong, the whole business may be at risk
of going under because of the partnership liability. Again, although
this is rare, it is important to consider when choosing this kind of legal
business entity. Types of considerations like this can protect your investment
in the long run.
Speaking of investment, an
advantage to a partnership is the ability to raise more funds with the influence
of more people. Instead of having to shoulder all of the capital upon startup
yourself, a partnership can help business owners divide the cost of operational
expenses. And of course, because you're sharing costs, you and your partner(s)
will have to share profits as well. A benefit of this kind of legal business
entity is the financial ease achieved by being able to file your profits under
your individual tax return at the end of the year.
When starting a partnership,
it is important to draw up a legal agreement detailing how costs and profits
will be shared, what to do in the event of a partner wanting to leave the
business, how to settle disputes about business strategy, etc.
Corporations
Unlike sole proprietorships
and partnerships, where the owners are legally the same as their business,
corporations offer business owners a unique legal and tax benefit in the sense
that corporations are granted their own legal status. Therefore, this
business entity type is considered as a separate legal business entity from you,
your partners, and your shareholders. If your business were to be sued, it would
not put you or your personal assets at any risk. So wait...who are shareholders?
Whereas you're an owner / operator / member of your sole proprietorship or
partnership, you become a shareholder in a corporation, because this
type of business operates with stock, or partial ownership distributed amongst
several people. As a shareholder, you "own" a part of the business, but you also
have to routinely answer to a board of directors who steer the direction of the
company.
The downside to the legal
business entity of a corporation is that you have less individual freedom to
make executive business decisions, and you are not in total ownership of your
business. This business entity type is more difficult to begin and dissolve, and
often must comply with a series of complex federal and state regulations and
taxes. However, the obvious benefit to this type of legal business entity is
that you have more individual legal protection with the separation of yourself
from your business in the event of a lawsuit.
Limited Liability Company
(LLC)
Finally, a Limited Liability
Company (LLC) is a sort of combination of all of the above business structures.
Like the "corporation" business entity type, an LLC offers a legal distinction
between a person and their company, but like a sole proprietorship or
partnership, it offers the owner or member (we're back to being called
members now) control over business decisions, tax breaks, and offers no stock
option. There is no limit to how many members an LLC may have, and it is also
possible to just have one member. The obvious upside to this type of legal
business entity is that it provides the best parts of both worlds, corporation
and non-corporation, but the downside is that it is more difficult to file than
a partnership (but is still less difficult than forming a corporation). To date,
the federal government does not recognize an LLC as a classification
when you file your federal taxes, so you must file either as a sole
proprietorship, partnership, or corporation.
So What do I do Now?
As with any kind of legal
decision, deciding which business entity type is right for your business is a
big decision that requires a lot of thought. This is just an overview of the
primary differences between each major legal business entity, so before making a
decision, check with your lawyer or accountant to decide which is best for your
financial and business interests. It seems complicated at first, but once you
get registered with the state, you'll be on your way toward owning and operating
your own business!
About
the Author:
Darrel Giann is the founder
of
Just14-95.com, a website that helps individuals begin a career in finance
and
earn extra income. Giann is also a financial consultant who has years of
experience teaching people how to get ahead in life. He now works to help others
achieve financial freedom. To learn more about Just $14.95, please visit
www.Just14-95.com.
Article Source:
ArticlesBase.com
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