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When starting a small business, one of the first things you need to do is choose what type of entity it will be. There are several different types of entities, each with their own advantages and disadvantages. The type of entity you choose will depend on several factors, including the size and structure of your business and your personal liability preferences.
The most common types of entities for small businesses are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Let's take a look at each one in more detail:
Sole Proprietorships
A sole proprietorship is the most basic type of business entity. This type of business is owned and operated by a single individual, and there is no legal distinction between the owner and the business. Sole proprietorships are relatively easy and inexpensive to set up, and they offer complete control over the business to the owner. However, sole proprietorships also have some disadvantages. Because there is no legal distinction between the owner and the business, the owner is personally liable for all debts and liabilities incurred by the business.
Partnerships
A partnership is a business entity that is owned by two or more individuals. Like a sole proprietorship, there is no legal distinction between the owners and the business. Partnerships are relatively easy to set up and offer complete control over the business to the owners. However, similar to sole proprietorships, partners in a partnership are personally liable for all debts and liabilities of the business.
Corporations
A corporation is a legal entity that is separate from its owners. Corporations can be either for-profit or nonprofit. The main advantage of forming a corporation is that it limits the liability of the owners—the shareholders—to only their investment in the corporation. Shareholders are not personally liable for debts or liabilities incurred by the corporation. However, corporations are more expensive and time-consuming to set up than sole proprietorships or partnerships, and they also have more ongoing compliance requirements.
Limited Liability Companies (LLCs)
A limited liability company (LLC) is a hybrid legal entity that offers some of the same advantages as a corporation but with less paperwork and compliance requirements. LLCs are owned by one or more individuals called members. Like shareholders in a corporation, members of an LLC are not personally liable for debts or liabilities incurred by the LLC. LLCs are relatively easy and inexpensive to set up, offer complete control over the business to the members, and have fewer compliance requirements than corporations.
Bottom Line
There are several different types of entities you can choose for your small business, each with its own advantages and disadvantages. The type of entity you choose will depend on several factors, including the size and structure of your business and your personal liability preferences. To learn more about which type of entity is right for your small business, contact an experienced Business Law attorney.
