When starting a business, it is important to know and understand the different kinds of business entity types so you can choose the best fit for your company. When choosing an entity type, there are a number of factors that should be considered, such as legal liability, power distribution, ownership and taxes. Options for business entities include: limited liability companies, corporations, partnerships, and sole proprietorships. We’ll be looking at the most common business entity types so you can find what's best for you.
If you are a foreign business owner look at this article.
What is an LLC?
The first option that many choose is the Limited Liability Company (LLC). An LLC does not have owners or stockholders, but instead, has members. Members have the power to make decisions and get payments, but their liability is limited. LLCs are similar to partnerships because members have the power to make decisions. In addition, LLCs behave like a corporation in terms of restricted liability. The main separating factor of LLCs from other entity types is that the business is viewed as its own entity separate from its members.
What is a Corporation?
A corporation is a lot like an LLC as far as liability is concerned. It is also similar because it is viewed as its own separate entity as well. Corporations are owned by stockholders in the form of shares. The power of the stockholders’ decisions is usually related directly to the percentage of stock held. Big decisions about the business are generally decided by a vote amongst the stockholders. In addition, corporations can also have a board of directors, which is given the power to make decisions on behalf of the stockholders. The corporation has the ability to grow and shrink rapidly as well as the longevity to outlive its owners.
What is an S Corporation?
There is also the option of an S corporation. The S corporation behaves a lot like a corporation, but with limitations such as classification of stock and number of shareholders. S corporations are also taxed differently and are usually smaller businesses.
What is a Partnership?
A partnership forms when two or more individuals contribute funds, services, or goods to form the business entity. A partnership is privately owned by two or more individuals. These individuals have complete authority to make decisions for the company. These same individuals, however, are held liable for the company in terms of debts and profits. The main differences between a partnership and a sole proprietorship are the number of owners and the way they are taxed. Both are viewed as privately owned. Overall, partnerships usually have more stability because they have more than one party to be dependent on for funds and resources.
What is a Sole Proprietorship?
Sole proprietorships are businesses that are privately owned by a single individual. The owner assumes all risks and liability of the company because they provide goods, funds, and general resources for the business. In addition, the business is not a separate entity and when the owner dies, the business terminates as well. These types of businesses are typically short-lived in comparison to other entities due to only having one resource to draw from versus having a partner or shareholders.