If you are starting a business, one of the many decisions you will need to make is to decide what type of business entity it will be. Historically, the three main types of business entities were sole proprietorships, partnerships, and corporations. Today, another common entity is the limited liability corporation (LLC). Here is an overview of each:
1. Sole Proprietorship.
This is an enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. It is easy and inexpensive to establish, and the owner has full control of it. Furthermore, there are tax advantages because the income simply flows through to your personal income tax return. However, the disadvantage is that the owner can be personally liable for the business – meaning that the owner’s personal assets may be at risk. Use caution before operating as a sole proprietor, especially if you are in a business where lawsuits are prevalent.
This is an arrangement where parties (the partners) agree to cooperate to advance their mutual interests. It is also simple to establish, allows for owner control, and has the added advantage of bringing in partners that may supplement your personal skill set. For this reason we often see professional services organizations, i.e., law firms, accounting firms, and doctors’ offices, formed as partnerships. Partnerships also offer pass-thru tax advantages. Again, the disadvantage is potential liability – a partner that participates in running the business may have unlimited personal liability.
This is a group of people or company authorized to act as a single entity. It is more expensive to establish and maintain, but offers several advantages. Corporations provide protection against personal liability, make it easy to raise funds by selling ownership shares, and have a continuous life. However, because a corporation is treated as a separate entity, its disadvantage is the fact that the corporation’s income is taxed twice: first at the corporate level, then at the personal level of its shareholders (often referred to as double taxation.)
This type of entity can be one person or a group of people, all of whom are known as members. LLCs are created by and regulated by state law, so they differ from state to state. Generally there is an operating agreement among the members, and in the absence of an operating agreement, the state LLC law will govern how it operates. The advantage of the LLC is that it combines the pass-through taxation of a sole proprietorship or partnership with the limited liability of a corporation.
For assistance with setting up your business or choosing an entity type, or with any other legal needs related to your business or estate planning, contact Fournier Legal Services at firstname.lastname@example.org or call 860.670.3535 now for a free consultation and planning session.
Joe received his law degree from the University of North Carolina–Chapel Hill School of Law and his Accounting degree from the University of Rhode Island. He is admitted to practice law in Connecticut, Massachusetts, and Rhode Island, and he is a CPA. He is an Adjunct Professor and lecturer at the University level and has been a frequent speaker on business planning and legal matters.