What is a Business Entity and How Do You Choose the Right One?
One of the most daunting questions that budding entrepreneurs face is how to get started. The legalities around registering a business entity are just about as clear as mud (in other words, not at all!).
That can make registering your business and getting everything started quite a frustrating task. And if you’re getting frustrated even before you begin your company’s actual operations, then that does not bode well for your future at all.
In this article, we’ll help assuage some of that frustration. We’ll explain to you exactly what a business entity is, and the different types that exist. We’ll help you figure out which entity type is perfect for your future company.
What is a Business Entity?
To define the business entity, we have to first understand what just a general entity is.
An entity is simply a body that is recognized by the government. This includes people. You, as a resident of your country and state, are an entity recognized by the federal and state governments.
In the same way, a business is an entity recognized by federal and state governments. You have to register your business as an entity so that you can do processes on it that are separate from you. Your business is an entity separate from your entity as an individual, and as such, it is audited by the government and regulated in a different way than you are.
If you’re thinking that you’ll just take your chances and now register your business at all, think again. You won’t get far. To do just about anything in the business world, you’ll need to provide evidence of your registration.
This could be for something as simple as opening a business bank account or doing your taxes. You can’t do such things as an individual, but rather have to do it as a business entity.
Business Entity Types
Now that you have a solid grasp on the definition of a business entity and why it exists, we can begin to understand what are the different types of entities that you can choose from when it’s time for you to register your business. Use this guide for further instruction as well.
A sole proprietorship is one of the most common types of business entities. Just as it sounds, a sole proprietorship is owned by one person: you. There are no partners, there is no shared ownership, there’s just you.
There are several limitations placed on a sole proprietorship. The most significant one is that they have to operate in one industry and in one location. You can’t have different branches of a sole proprietorship existing; you can only have the one.
Thus, this isn’t a great option for businesses that plan on expanding and growing very fast. Even though you can always restructure your business later on down the road, that’s a lot of additional expense and time that you don’t need to waste. Instead, if it’s your plan to grow very fast, use one of the other business entity types listed here.
However, if you plan to stay in one location, don’t plan to add any partners, and are satisfied with the limitations placed on you, then a sole proprietorship just might be the perfect option for you.
Limited Liability Company
A limited liability company, or LLC, is another very common type of business legal structure. You’ve probably heard of these, as they really do proliferate across the United States. Standard procedure these days as people embrace the dot com boom and start online businesses is to start the company as an LLC. As you’ll see, an LLC affords you significant flexibility while placing limited restrictions on you.
The most attractive feature of a limited liability company is in the name: limited liability. That’s right. As a partner in an LLC, you don’t have personal liability even if the company goes under. The buck stops with the entity and doesn’t get passed on to you, even if you are a significant owner in the business.
Other pros exist as well. An LLC is very easy and quick to setup. It doesn’t cost a lot to register. You can have as many partners as you want.
The third very common type of business entity is a corporation. This is one that you’re probably very familiar with, as the majority of very big companies that exist in the world today are corporations. Any company that’s publicly traded, for instance, is a corporation.
The principal benefit of starting a corporation, compared to a sole proprietorship or a partnership, is that a corporation allows a much greater degree of complexity than any other business entity type.
A corporation can be multinational, have as many shareholders as it wants, and can very easily transfer ownership. The latter especially is a far more complicated process with any other kind of business entity. In addition, assets of the owners remain protected and are not liable should the business’s creditors come calling.
However, there are some disadvantages. Namely, a corporation is far more expensive to start than either a sole proprietorship or a limited liability company. In addition, they require a lot of paperwork to be completed.
Lastly, corporations are also double taxed. The business entity is taxed whenever it turns a profit, and then you as an owner are also taxed whenever you report your personal income as well. This isn’t the case with the other business entity types. If you’re going to have shareholders though, this is going to be the only way that you can go.
Understanding a Business Entity, Made Simple
At the end of the day, understanding a business entity really isn’t as complicated as it’s made out to be. With this guide under your belt, you should have a strong grasp of the different types of entities out there and why you need to register one.
For more business advice, make sure you go ahead and check out the articles on the rest of the website!