Business Entities You Need: The Best of Business Part 2

There are 4 different business entities you will have to choose from. It’s time to take the next step in building your dream business. Now it is time to pick your business structure. 

If you’re reading this, chances are you did all your research and homework that was suggested in Part 1. You have determined that your business can make a profit. Next, you evaluated your market. Then, you have identified your competition.  

So, let’s move on to Part 2.

Which Business Entities Are Right For You?

This will be the gravest and foremost question you need to be answered before taking that first step into the business world. What type of structure will meet your needs?

Now, let’s ponder and analyze the most popular types of businesses. These top entities are merely open-ended suggestions to consider. And, by no means, are the only options available to you. 

This information is presented here for your general knowledge of the various ways you can structure your business. Therefore, this information addresses the financial and legal portion of your company.

The savvy entrepreneur will follow up by seeking a professional accountant and legal counsel. A counsel’s expertise parallels their chosen structure.

4 BASIC and MOST COMMON Types of Businesses:

Sole Proprietorship:

A business owned by a single person. There is no legal or financial difference between the business and the owner. 

Pros…

• The owner keeps ALL the profits.
• Quick decision-making.
• Easy to manage.
• No consultation is needed.
• The owner answers to no one.
• Flexibility with changes in products, financial decisions, etc.
• Easy to start. Little paperwork to establish a business.

Cons…

• The owner is responsible for ALL losses.
• Unlimited Liability. All of the owner’s personal assets can be sold to pay off business debt.
• An owner can be sued.
• The owner pays personal income taxes on ALL profits.
• Bad business debt affects the owner’s personal credit rating.

General Partnership:

A business owned by two or more people who share responsibilities. A general partner(s) runs the business. Hence, they contribute money to raise capital to launch the business. All partners are decision-makers. 

Some partners may contribute different percentages to the partnership. And then, some partners may serve in different capacities. 

Pros…

• Easy to start. Does NOT involve as many legal procedures as other entities.
• Requires less capital than a sole proprietor. Partners invest equally or proportionately. The investment ratio determines the percentage of profits.
• Consultation opportunity between partners provides different opinions on issues.
• Quick decision-making without long meeting discussions.  A phone call, text, or email can solve issues quickly.

Cons…

• Unlimited Liability. ALL partners’ personal assets can be sold to pay off business debt.
• Bad business debt can affect ALL partners’ credit ratings.
• Internal conflict. Partners may fail to agree on the practices, ethics, and vision of the entity, thus causing issues.
• EACH partner shares in the burden of paying personal income taxes on the profits.

Corporation:

A fully independent business with shareholders who elect a board of directors to oversee the day-to-day operation of the entity.

Pros…

• The owner has limited liability whereby their assets are safe. Which means they are untouchable by creditors in the event of failure.
• Lower taxes because the owner and business share the profits.
• (Sometimes) Benefits may be deducted as business expenses.
• Corporate ownership is transferable. In the event of foreseeing bad times, the owner can sell the corporation and avoid losing their capital investment.

Cons…

• Expensive to set up.
• A multitude of legal paperwork.
• Must file ownership with the Secretary of State.
• Corporation operates as a separate legal entity, hence it pays taxes.
• Slow decision-making. Need to consult the directors before making changes and decisions.

Limited Liability Company (LLC):

An LLC is structured in such a way as to protect your personal assets. Therefore, (Generally speaking) the officers are not liable for the debts of the corporation. 

Consider this a hybrid entity. It is a mixture of a sole proprietorship or a partnership AND a corporation. Also, it is designed to make it easier to start small businesses.

(Note: a limited partnership would be commonly referred to as an LLP, in lieu of an LLC).

Additionally, an LLC has exclusive rights to own company assets, to sue, or to be sued. The taxation formula is like a corporation. But its members have a single taxation process like a partnership.

Therefore, it has no stocks. The owners are members and NOT stockholders. As a matter of fact, members work under an “operating agreement” requiring members to meet at least once or twice a year. 

Pros…

• It’s a single taxation system. The LLC does NOT pay taxes. They are “passed through” to the members who pay the taxes under their personal income.
• Liability PROTECTION. Members have limited liability. Members’ assets CANNOT be taken away to pay off business debt.

Cons…

• More capital investment is required.
• There is more paperwork required.
• More legal procedures are required.

Making the Decision for Your Business Entities

These are merely the 4 basic examples of the most popular types of biz structures. Therefore, within these basic forms of businesses are numerous “spinoff” entities.  

Consulting an accountant and/or attorney can provide additional details and advice. They can guide you on others that are more pertinent to your type of biz.

Also, check tips to help you deal successfully with the IRS. After all, if you want profits you must know how much you will owe in taxes.

Consider this information as a simple guideline to help lead you in the right direction. Keep in mind that the entity you select today may not be finite. 

Now, you can begin your company as one type of structure. Then, once established, you can transfer it into another structure. As your venture changes and grows things change. However, you must start somewhere.

Things To Ponder For Business Entities 

• How much working capital will you need to get this entity off the ground?
• Do you know how much liability are you willing to risk in the event of a failure?
• How much time, effort, and energy are you willing to contribute to making this legal entity successful?

Now, it is time to begin making important strategic decisions. Hence, ponder these three questions carefully. Jot down the answers. Then, read them back to yourself.  

Conclusion of Business Entities

Finally, does it make sense? Seeing it on paper, steering back at you will help put things into perspective. It will make it easier when deciding which business entities to choose from.

Now, It’s time to spread your wings and fly. Lastly, I’d love to know which one of these business entities you are in with your company.