Deciding to start your own business is a big step in your career. Knowing the ins and outs of the various business entities that you can choose from can ensure that you start with the right entity from the very start. Here are the most common types of business entities you can pick from and a quick look at their pros and cons.
Sole Proprietorship
The sole proprietorship is the most commonly used type of business entity. It gives full control of the business to the owner. A sole proprietorship is very simple to form and doesn’t require its own taxes to be submitted. Rather, the owner of the business will show their business revenue and expenses on their individual tax return. The owner of the sole proprietorship is financially responsible for all the business obligations that are willingly entered into.
Partnership
When there are two or more people who agree to own the business, it can be formulated as a partnership. There is no extra tax burden to reflect the profits or losses of the business when filing under a partnership. The business transaction law services explain that the profit or loss of the company is simply passed through the partners’ individual tax returns. Like a sole proprietorship, a partnership is very easy to form. However, all partners are held liable for the financial obligations entered into by the business.
Corporation
A corporation works to separate the business as its own entity apart from the owners. A corporation requires its own taxes to be filed and it can be held liable for its actions. This type of business entity requires more work to form and is more expensive to do so. As a corporation, the owners can’t be held liable for the actions of the business, including financial obligations. Corporations do require extensive record-keeping that can be costly and time-consuming.
Limited Liability Company
Seen as a hybrid of a partnership, a limited liability company has been gaining in popularity over the last decade. An LLC allows for the benefits of a partnership and a corporation wrapped into one. The profits and losses of the business can be easily passed through to the owners’ tax returns, so there’s no actual taxation to the business itself. Under this type of business entity, the owners are not personally held responsible for the financial obligations of the business.
As you can see, there are many different types of business entities to choose from. By understanding the pros and cons of each type of business entity, you can better prepare yourself for choosing the right one. Be careful to choose the right entity from the start as you can’t always switch the entity type in the future.