Business Entity Types & Organization Overview
Oh no! Which business entity should you choose for your business? There are so many different types of legal entities, such as sole proprietorship, C corporation, Subchapter S corporation, partnership, limited liability company (LLC), and limited liability partnership (LLP).
Today, we’ll help you figure out what type of legal entity is right for your business.
When starting a business, one of the most important things to consider is what type of legal structure you should use. You might hear this called legal entity or business structure and in most cases, this really just means a business name (for example, whether you’re an LLC, LLP or Sole Proprietorship). But despite its simplicity, the legal structure you choose could make a major difference to how much tax you end up paying.
Over the years we realized you Do Not need to create a LLC, partnership, corporation or purchase expensive trademarks right away.
This can wait until you and your business are ready and making money! Before you start allocating money to creating a new legal business entity you should try to prove the concept first through web traffic and sales revenue.
Once your business starts to make a few hundred dollars in revenue, you can start process of creating a new business entity and figuring out your financial tracking systems for taxes.
Many people when they start their business ignore the legal structure of a business entity and think about it after they already are operating. It is very important to have your business set up properly from the beginning.
Most Important Advice create a separate checking account and credit card and use them for ONLY this business.
Business Entity Types
Use the list below to get a better understanding of which business entity types might best fit your business.
A Sole Proprietorship is the most common type of business entity because it is simply ran using your social security number (SSN) instead of an Employer Identification Number (EIN).
– PROS: This is a great fit for when you’re starting out as a 1 person team. – CONS: All Liability for the business falls upon you.
A General Partnership is created when you and a business partner(s) create an agreement to form a new entity which will utilize a EIN.
– PROS: Liability for the business is split between you and your partner(s) according to partnership agreement. – CONS: Need to pay for and obtain an EIN from the IRS. Your partnership entity will pay its taxes using this number.
Limited Liability Company (LLC)
An LLC is essentially a juiced up General Partnership. This means that it limits the financial/ legal liability of the partners against each other and against outside threats. Please note that this does not mean you can’t be sued, it just means they will be filing a suit against your business entity (the LLC) not you.
– PROS: No personal liability in the event of legal or financial trouble. – CONS: This entity type will require filing articles of incorporation since this is a corporation.
You may need to file other documents as per your states requirements, each state has different requirements for starting a corporation. You will also need an EIN for this entity type.
These entity types offer the same protection from the outside as a LLC but do not offer protection amongst members. However an S corp can offer a tax benefit, specifically you will declare your businesses income as your own (not as corporate income) however with an S corp you are limited to A maximum of 100 shareholders. All shareholders must be U.S. citizens or permanent residents. Foreign investors can’t buy in. S corporation owners can’t be corporations, limited liability companies or general partnerships. C corporations can be owned by any of those. S corporations only issue one type of stock.
– PROS: Tax Benefits – CONS: If all of this seems very confusing – don’t worry.
If you’re at this stage you will be making enough money to hire a CPA for your taxes and a Lawyer to help with document preparation.
(Disclaimer: All the info contained in this article is based from personal experience. I am not a licensed accountant or financial advisor – BE SURE to contact a licensed CPA, Accountant and/or Lawyer before creating a new entity.)