Jun
14
2019

Which Business Entity Are You Going to Choose For Your Business?

There are numerous types of Business entities to choose from when starting your own business and each one of them are important to the survival of your business. Choosing the wrong type of entity could spell disaster for you business. Each business entity has different tax implications as well as different internal responsibilities such as meetings, articles of incorporation etc. Which one you choose is entirely up to you. There are five main business entities for small businesses being use today in the United States, and maybe even around the world. My main goal in this article is to give you some general information about the five different entities for small businesses and their pros and cons. The five entities used today are as follows:

Sole Proprietorship- The sole proprietorship is the simplest form of business entity. It is a form in which and individual conducts business in his or her name or under a trade name rather than a separate legal business entity.

Pros:

* There is no requirement to register a sole proprietorship with the state. ( unless you are using a trade name, in which case, you should register the trade name to protect it from use by others)

* There is no double taxation. The person is tax at his or her own tax rate for profits earned in the business.

* There are no corporate formalities to conduct or maintain.

* Sole Proprietors have complete control over the business.

Cons:

* There is no limitations of personal liability for the sole proprietor, which means the liabilities,debts and judgments against the business can be attached to the personal assets of the sole proprietor including personal bank accounts,cars, homes, and anything else that has value.

I personally would never form a business under a sole proprietorship because of the no limitations of personal liability.

Partnership/ Joint Venture- A partnership or joint venture is a form of business enterprise in which two or more “individuals” ( or entities) join together and participate for profit.

Pros:

* No formal requirement to register a partnership with the state.(recommended that you do)

* There is no double taxation.

* The corporate formalities Are not mandatory to conduct or maintain.

* All partners Can act on behalf of the partnership.

Cons:

* There is no limitations of personal liability for the partners in a partnership.

* Partners are financial liable for he actions of their partners.

* All partners can act on behalf of the partnership.

I would be hesitant to start a partnership only because of the no limitations of liability for the partners in the partnership. I would make sure the responsibilities are spelled out and what all the partners can obligate the partnership to.

Limited Partnership (LP)- A limited partnership is an entity formed under state law by two or more “individuals” associated for the purpose of conducting a business for profit. The LP consists of one or more limited partners and at leas one general partner(note: general partners can be corporations in order to further limit personal liability).

Pros:

* The personal liability of limited partners is limited to their contribution of capital in the LP.

* There is no double taxation applicable to LPs. LPs are pass- through entities.

* The corporate formalities are not mandatory to conduct or maintain.

Cons:

* there is no limitation of personal liability for the general partners of the LP, which means that a judgment can be placed against the personal assets or the general partner(s) including their bank accounts, cars, homes and anything else that is of value.

* General partners are financial liable for the actions of their partners.

* Limited partners cannot participate in the management of the LP.

I would not want to be the general partner of a partnership because of the no limitations of personal liability for the general partner(s).

Limited Liability Partnership (LLP)- An LLP is an entity formed under state law by two or more “individuals” associated for the purpose of conducting a business for profit

Pros:

* The personal liability of partners is limited to their contribution of capital in the LLP unless they or someone they

directly supervise has acted wrongfully.

* There is generally no double taxation applicable to LLPs. they are pass-through entities.

* The corporate formalities are not mandatory to conduct or maintain.

* All partners can participate in the management and conduct business of the LLP.

Cons:

* Some states limit the types of enterprises that can be formed as an LLP.

Limited Liability Company (LLC)- An LLC in an entity formed by one or more individuals under state law. The owners of an LLC are called members (rather than shareholders) and the LLC is treated as a partnership for federal tax purposes.

Pros:

* The personal liability of an LLC member is limited to their contribution of capital in the LLC.

* There is generally no double taxation applicable to LLCs.

* The corporate formalities are not mandatory to conduct or maintain.

* LLC members can manage the business.

* LLCs can have one member or multiple members.

Cons:

* Because of its relatively new form in most states, common law applicable to LLCs is not as established as with partnerships and corporations.

* LLC members must pay self-employment taxes if they have earned more than $400 from the business during the tax year.

This article was written as general education information only and is in no way to be considered as legal advice or any tax advise. I encourage everyone who is thinking about starting their own business to seek competent legal counsel by a licensed attorney or a licensed tax accountant.

Randy Steagall
Is an avid traveler who has traveled most of the United States. He worked for the IRS for 21 years. He is a successful entrepreneur in the travel industry.

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