A Business Entity is the various types of legal structures that businesses can set up. Each entity type has unique characteristics that determine its legal and financial obligations. Here are some of the most common business entities:
This is the simplest form of business entity, with most businesses starting in this capacity. Sole Proprietorships are owned and run by a single individual, they are easy to set up and do not require any formal registration or paperwork. The owner has complete control over the business and is personally liable for all of its debts and obligations.
A partnership is a business that is owned by two or more individuals who will share the profits and losses of the business. Each partner will be personally liable for the business’s debts and obligations. Typically, a partnership agreement is created that outlines the division of profits and management responsibilities.
A corporation is a legal entity that is owned by shareholders (a shareholder can be a person, company, or organization that holds stock(s) in a given company). A corporation is a separate entity from its owners, and it has its own legal rights and liabilities. A corporation issues stocks to raise capital, and its owners have limited liability for the business’s debts and obligations. It is subject to more business formalities, such as annual meetings, and must pay corporate income tax.
Limited Liability Company (LLC):
An LLC is a hybrid entity that combines the advantages of a partnership and a corporation. LLCs provide a level of protection to their owners, it protects their personal assets in the event of a lawsuit or bankruptcy. An LLC can be taxed as a partnership or a corporation, depending on the owners’ preferences, it is best to get advice from a CPA to understand how best to set this up.
A nonprofit organization is a business entity that is organized for a specific purpose other than making a profit. Most often charities, educational institutions, and religious organizations are set up as nonprofit organizations, this allows them to be exempt from federal income tax and they may be eligible for grants and donations.
A cooperative is a business owned and operated by its members (typically employees of the company), who share the profits and control the business’s operations. It is a democratic entity where each member (employee) has one equal vote. Cooperatives typically exist in industries such as agriculture, finance, and housing.
A franchise is a business arrangement where an established company allows a third party to operate a business under its brand name and using its business model. The franchisee pays an initial purchase or buy-in fee and then pays ongoing royalties to the franchisor in exchange for the right to use its trademarks and business practices and other potential support.
It is imperative to understand your business’s nature, size, and goals before choosing the entity that makes the most sense for you. Each entity type has advantages and disadvantages for the business owner/s. We recommend seeking professional advice from your lawyers and CPA so that you can make a fully informed decision when setting up your new business structure.