Starting your business entails a lot of decision making, but probably the most important one relating to taxes is the type of legal structure you select for your company. So, what is a business entity or structure?
By: Tatiana Cortes
The way you decide to identify your business legally. This decision will have an impact on how much you pay in taxes, how much paperwork your business is required to do, your ability to raise money, and the personal liability you will have. But, how do you choose a business entity? To make the right decision you will need to research, research, research! Choosing the right entity that fits best for your business goals will save you time and headaches.
To help you answer questions like, what is the best business structure for a small business? Or what type of entity is best for my business? We have compiled a guide to choosing the best legal structure – Here are the business structures basics:
This is the most common form of business organization. It's easy to form and offers complete control and responsibility to the proprietor (owner). Sole proprietorships do not produce a separate business entity, your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. It can be hard to raise money because you cannot sell stocks and banks are hesitant to lend to sole proprietorships. However, this could be a good choice for low-risk businesses and owners who want to explore their business idea before establishing a more formal business.
It involves two or more people who agree to share the profits and losses of a business. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).
Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the business. Profits are passed through to personal tax returns, and the general partner must also pay self-employment taxes.
Limited liability partnerships give limited liability to every owner. It protects each partner from debts against the partnership, so they will not be responsible for the actions of other partners.
This type of legal structure can be a good choice for businesses with multiple owners, professional groups, and groups who want to test their idea before forming a more formal nosiness.
The law sees a corporation as an entity separate from its owners. It has its own legal rights, independent of its owners; it can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. There are several types of corporations:
C Corp: owned by shareholders are taxed as separate entities. Since C corporations allow an unlimited number of investors, many larger companies, including Apple Inc. and Amazon file for this tax status.
S Corp: were designed for small businesses and avoid double taxation, much like partnerships or LLCs. Owners also have limited liability protection.
B Corp: AKA benefit corporations, are for profit entities structured to make a positive impact on society. B Corps are different from C Corps in purpose, accountability, and transparency, but are not different in how they are taxed. Driven by both, mission and profit shareholders hold the business accountable to produce some sort of public benefit in addition to a financial profit.
Limited Liability Company
Selecting this business entity lets you take advantage of the benefits of both; the corporation and the partnership business structures. LLCs protect you from personal liability in most cases. Your personal assets will not be at risk in case your LLC faces bankruptcy or lawsuits. Profits and losses can get passed through to your personal income without facing corporate taxes. Members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security. This can be a good choice for medium-or higher-risk businesses.