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Starting a Business: Choosing the Right Type of Business Entity

Starting a Business: Choosing the Right Type of Business Entity

More than 70 percent of businesses in the US today are sole proprietorships. These owners assume all the risks of their business, but they also receive all profits.

Are you starting a business, but you aren’t sure what type of business entity would be best for you? Choosing the right one is an important strategic step for your future. Keep reading to learn more.

Different Types of Business Entities

There are several different business entities you can choose when forming a company. Tax laws treat each one differently and they carry a different level of risk for the owner.

A business entity is a legal structure that affects things like financing and taxes. The entities exist at the state level, and you’ll likely get any needed permits and a tax number at the same time.

There are five main structures to choose from:

  • corporations
  • general partnerships and limited liability partnerships
  • limited liability companies
  • sole proprietorships

Your choice of entity will depend on your business risk and whether you have partners involved in the project.

Sole Proprietorships

The most basic business structure is a sole proprietorship. It works well when one person or a married couple starts a business. You don’t have to register with the state, but you might need permits or licenses to be legal.

Profits flow to the owner’s tax return, and they assume all liability. The owner’s assets are at risk with this structure.

Limited Partnerships

This is a registered entity usually made up of two types of partners. The general partners run the business and take on the risk.

Limited partners are the primary investors in the business. This structure shelters them from risks as well as taxes. The word limited refers to their limited liability.

Corporations

These legal entities are separate from the owners who are shareholders in the company. Dividends flow to owners and attract tax in their hands.

The corporation assumes all risks and files separate tax returns from the owners. Corporations must have company bylaws, and managers must report to the board of directors.

Limited Liability Company

These companies give owners some flexibility around income taxes. They can have the profits flow to their taxes.

They protect the owner from business risks. Owners don’t have to set bylaws or answer to board members.

Get Professional Advice

If you’re starting a business, you might choose to begin with a sole proprietorship, but there are other considerations to take into account.

Risk comes in many forms. A proprietorship doesn’t protect the owner. If you’re worried about business risk affecting your assets, you might consider a limited liability company or LLC.

There are many advantages of LLC structures. It’s good to consult with a professional who can assess your specific situation and provide some advice.

The Right Type of Business Entity

When you know the differences between each type of business entity, you’ll be able to make a more informed decision about the structure that works for you. You can operate your business with less risk to your assets.

Did you find this article helped you make your decision? Use our simple search feature to discover more helpful business articles.

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