There are pros and cons to each business entity type, but picking the right one can be challenging. Take the confusion out of the selection process by exploring the different structures and their pluses and minuses. Then, determine which business structure will work best for you.
A sole proprietorship is the simplest business entity. It is headed by one person who is the owner and operator of the establishment. Commonly used by freelancers and other service professionals, it’s also a viable option for many other businesses—from restaurants to retail stores—being managed by one person.
Partnerships, as you might expect, are owned and operated by two or more individuals. There are kinds of partnerships: general partnerships and limited partnerships. In general partnerships, all partners manage the business and assume responsibility for its debts.
In limited partnerships there are two kinds of partners: those who own, operate, and assume liability for the business (general partners) and those that act only as investors (limited partners). Limited partners don’t have any control over business operations, and have fewer liabilities. Real estate investment businesses are commonly formed as limited partnerships.
Corporations are completely independent legal entities that exist separately from the company’s owners. With this business entity there are many more regulations and tax laws that the company must comply with. Methods for incorporating, fees, and required forms vary by state.
In order to avoid some of the drawbacks associated with operating a regular corporation, some business owners choose an S-Corporation business structure. With an S-corporation, company profits and losses are passed on to shareholders.
Limited liability companies (LLCs) are a hybrid business entity type that blend some of the positive features of partnerships and corporations. They give owners liability protections without having to pay double taxes.
With a better understanding of how the common business entity types work and their respective pros and cons, you can determine which business entity works best for your small business.