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What Are Business Entities?

How safe would you feel riding a cab while the driver tells you he doesn’t know the difference between third-party and collision coverage? Well, that would be like an entrepreneur not knowing the difference between an LLC and C Corp!

Different types of business entities exist to ensure the safety of the business and its owners. Not knowing exactly what is out there actually could put your assets in grave danger in the event of a crisis!

So if your a budding entrepreneur or have been in business for years, make sure you stay up to date on what’s out there.

So, what are business entities and how can business owners make the most of these structures? Keep reading to find out.

What Exactly Are Business Entities?

A business entity essentially defines what is expected of a business from a legal standpoint. 

It determines how it trades. It regulates how much it is taxed and who – or what – is responsible for any misunderstandings. The law chooses to view an impersonal business as an “entity” that can have the rights and accountability of a person.

By making a business an “entity” in itself, it creates a degree of separation between its owner’s assets and its own. How much liability and responsibility the entity possesses depends on the “structure” the owners choose.

As we are about to see, there is no better or worse structure. Every type of entity serves a different purpose. The best structure for your business depends on what your plans for it are. 

So what are these types of business entities, and what exactly do they do? Let’s find out!

Sole Proprietorship

A sole proprietor is one person running a business. This type of structure is labeled as an “unincorporated business”. This means that a sole proprietorship is technically not an entity. In other words, there is no separation between the owner’s assets and that of the business. The owner is 100% liable in the event of a lawsuit.

This structure works well for smaller businesses because it is easy to set up and business expenses can be tax write-offs!

While there is far less paperwork, however, there are far more risks when it comes to the protection of your assets. In the eyes of the law, you and your business are one entity!

General Partnership

This type of business has an almost identical structure to a sole proprietorship. The only difference is that two or more partners share the assets of the business. This also means that all partners are equally liable to risk.

Again, like Sole proprietorship, there is very little to do and maintain. This structure is appropriate for owners who want equal authority over the business management. But complications can be many when two or more owners get locked in a power struggle and lawyers get involved.

Limited Partnership

This is our first legally recognized entity. This is because there are two types of partners in this structure: the general partners and the limited partners.

While general partners assume full responsibility and liability for the business, limited partners mainly function as investors. This allows the limited partners to receive perks like liability protection as their responsibility in the business is not as weighty as the general partners. 

A limited partnership is good is more attractive to investors because they will feel more secure with this entity than with the two above-mentioned structures. And as it is officially a state-recognized entity, there is a lot more paperwork to work through.

Corporation

This is an entity that is completely independent of its owners. From a legal perspective, it is treated as a living, breathing entity with its own rights, liability, and finances. 

A corporation’s owners become “shareholders” and have protection from lawsuits and liability. Its stocks are available to the public making the raising of capital much easier than the previous structures!

But there is a price to pay! Paperwork and record-keeping are extensive, to say the least. Fees and taxing can be heavy, depending on where you live.

You may have heard of the terms C Corp and S Corp. These are terms that define tax structure and not legal structure. Both C Corp and S Corp are corporations. The only difference between the two is their tax status

Limited Liability Company

Like the love-child of a partnership and cooperation, an LLC gives you limited liability while giving you the option of being taxed like a sole proprietor or partnership.

Owners of an LLC are called “members” who are owners through a partnership and not through stock purchases. 

Due to its predominantly partnership-like nature, paperwork is very straightforward in comparison to corporations. That being said it is not as affordable as going for sole proprietorship or partnership.

Because of the flexible nature of this structure, you can get the best of all worlds and transition to a corporation at a later date. Have a look at which model might be right for you.

The Sky Is the Limit

As entrepreneurs, knowing what business entities can do for the growth of your empire is vital! For every one of your business strategies, there is a structure that will protect you and your assets. Choose wisely! 

Before choosing what type of entity you want your business to become, ask yourself, “where do I want my business to go?” “What are the potential dangers I could face?”

Once you’ve found satisfying answers to such questions, aim to choose a structure that suits your vision.

Be sure that the type of entity is working to the prosperity of your business. Be patient! Be humble! With the right amount of attention and determination, you can be sure that your business becomes the vehicle that drives you to your ideal destination!

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