Opening a new business is exciting – but also a bit daunting. You have a lot of decisions you have to make, not the least of which is what kind of business entity you want to choose.
The most common types of business entities are sole proprietorships, partnerships, limited liability companies (LLCs) and corporations. Each type has its own advantages and disadvantages, including liability protection, tax implications and management structure.
Sole Proprietorship
A sole proprietorship is owned and operated by a single individual and requires no formal registration with the state. The main advantage of a sole proprietorship is its simplicity and low cost of formation. However, the owner has no protection against personal liability for business debts and is responsible for all business decisions and obligations.
Partnership
A partnership is owned by two or more individuals who share profits and losses. Partnerships can be general or limited. In a general partnership, all partners are jointly and severally liable for the business debts and obligations. In a limited partnership, one or more partners have limited liability and are not involved in the management of the business. The main advantage of a partnership is the ability to share profits and losses.
Limited Liability Company (LLC)
An LLC is a hybrid business entity that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs are owned by one or more members and are managed by the members who have limited liability for the debts and obligations of the business. However, an LLC is typically more expensive to form and operate than a sole proprietorship or partnership.
Corporation
A corporation is a separate legal entity that is owned by shareholders and managed by a board of elected directors. Shareholders have limited liability for the debts and obligations of the business. S corporations have certain tax benefits but are limited in their ownership and management structure. C corporations have no restrictions on ownership or management but are subject to double taxation. The main advantage of a corporation is the limited liability protection it offers its shareholders. However, corporations are typically more expensive to form and operate than other types of business entities.
This information is a lot to consider. Thankfully, you may have an easier time making your decision with the help of experienced legal guidance.