of Business Entities
Today, there are several business entity options available for
entrepreneurs. Like anything else, each of them has advantages
A sole proprietorship is an unincorporated business entity
that is owned by one person. It is very easy
to create and operate. Since the business and the individual are
identical, there is
to be filed with the government to form it or special maintenance
required to keep the business alive. As long as you continue
to call yourself a business, you are one.
Sole proprietorships cannot take advantage of special business
income tax rates since all income is considered individual income.
Sole proprietors are also not protected from personal liability
if they end up in a legal dispute with a client or another person
the course of conducting their business. If a sole proprietor
is sued, he is sued in his individual capacity. There are other
entities such as a corporation or limited liability company that
an owner protection from liability.
General partnerships are formed by two or more persons
who carry on a business for profit. Each of those
persons is individually
responsible for the partnership. This means that each partner
is personally liable
for the partnership’s debts and legal liabilities. In addition,
each partner is jointly and severally liable for the acts of
the other partner.
For tax purposes, all partners are considered self-employed and
claim their share of the partnership’s income on their individual
tax returns (the partnership itself pays no taxes). General partnerships
are relatively easy and inexpensive to create and maintain. Although
a partnership agreement is not legally required, it usually accompanies
the formation of a general partnership. Partnership agreements
generally cover topics like transferability, duration, and management
A limited partnership is very similar to a general
partnership in structure. The
main difference is that in a limited partnership,
there are two different kinds of partners: general
and limited. A limited partner does not take part in the management
partnership and is not liable for any more than
This type of entity is created to encourage investors
to become limited
partners and so they can share in the profits
but not lose more than their own contribution. Limited partners
not to participate
in the control of the partnership or they may
face loosing their status as limited partners.
Limited Liability Partnership
A limited liability partnership is a general partnership
that files a registration with the secretary
of state to operate as a limited liability partnership (LLP). Unlike
the general partnership, all of the partners
in a LLP enjoy
protection from many of the partnership’s debts and
liabilities. This provides a great advantage over the general
A “C” corporation is normally created through the
state’s statutes for incorporation. It is a separate
legal entity once it is formed. A corporation files its own
taxes. A “C” corporation can have unlimited numbers
of shareholders, and those shareholders can be any kind of
Corporations require the most maintenance out of all
other business entities. A board of directors must be
elected, annual meetings must be held, minutes of corporate
must be kept, and stock must be issued. And all this
applies even if you are the only shareholder in the corporation.
these formalities aren’t followed, you run the risk of
losing your personal liability protection if a court decides
that your corporation was just an alter ego of yourself created
to keep you safe from law suits (this is sometimes referred
to as “piercing the corporate veil”).
Additionally, corporations are said to be subject to “double” taxation,
once at the corporate level and once at the shareholder level.
You can avoid this drawback by not issuing dividends and simply
re-invest your income back in the company. Spending your income
on items that are tax-deductible is another way. You could
also form an “S” corporation discussed below.
An “S” corporation is much like a “C” corporation
in that it is also its own legal entity, protects its shareholders
from legal liability, and requires more maintenance. However,
an “S” corporation allows shareholders to claim
their share of the corporation’s income directly on their
personal tax return. This gets around the “double taxation” problem
of a “C” corporation. The drawbacks of an “S” corporation
are that they are limited to a maximum of 75 shareholders,
each shareholder must be a US citizen or resident and there
can only be one class of stock. However, if your intention
is to keep your business relatively small, this is an excellent
Limited Liability Company
A limited liability company (LLP) is for the most part
a combination between a corporation and a partnership.
An LLP provides the same kind of tax and liability benefits
as a corporation,
but has the same management structure as a partnership.
An LLP has members instead of partners. A member enjoys
from the liabilities and the debts of the LLP. An LLP
comes into existence when the Articles of Organization
to the state. The LLP members should create an Operating
Agreement to govern themselves by.
Regardless of the entity you choose, the steps to forming
it are essentially the same:
- Decide which state you want to form your company in.
You’ll need to either be physically present in the
state you choose, or hire a registered agent who is.
- Choose a name for your company. You’ll need to pick
something that isn't already taken in
the state you have chosen.
- Follow the instructions for your state to form your company.