Benefits and Drawbacks of Different Types of Business Entities

Before starting a business, you will need to determine which category of business entity you will require. The business structure will rely on many different factors. The goal of the business, the workforce you will have, and other factors.

Different Types of Business Entities

Each type of business entity has pros and cons. The legal structures are different for each of the following: Sole Proprietorship, Partnership, Limited Liability Company, Non-Profit, and Corporation.

Many of the specific benefits and complications are listed below.

Sole Proprietorship

The sole proprietorship business entity is easily created and is easy to maintain. The owner and the business is lawfully the same. There are no fees to create the business. The owner is allowed to claim a business loss from personal income taxes. The primary disadvantages are the owner is personally responsible for all debts, liable for the business & any judgments against the business. Personal federal income taxes must be paid for all net profits of the business.

General Partnership

This type of business is also easy to maintain and create. There are no costs connected with creating this business entity. The owners of the business are allowed to report the dividends on their part of net business revenue. The disadvantages are that all the owners are personally and jointly responsible for all debts, any judgments and all the partners will be liable for the business. All the owners will pay personal federal income taxes on the business’ profits.

Limited Partnership

This business entity will easily attract investors since they are liable only for their amount of investment in the business. The limited partners have less responsibility for the debts, judgments, and the liabilities the business may have than other types of entities. The partners can raise funds without decreasing any of the control of the business. A partner is allowed to leave the business without annulling the partnership. In this business entity, the partners are all liable for any judgments and debts the business may incur. This type of business is best suited for businesses like investment groups or real estate agencies. Limited partnerships can be more costly to set up than just a general partnership.

Regular Corporation

The owners of this business have a restricted liability for business’ debts, liabilities, and judgments. Business expenses can be subtracted from the income. Owners and the business are often paying much less on their federal income taxes by dividing the profits among the owners.

Drawbacks of a regular corporation is that it is more costly to establish than other entities, and there are complex forms and papers that need to be filed with the Secretary of State. The corporation is a separate entity and it will pay the taxes that are owed.

S Corporation

S corporation business owners have limited responsibility for the business’ debts, judgments, and liabilities. The owners will divide all the net profits and report only their dividend on their personal income taxes. They will also divide the net loss and that may balance out any other income by reporting a loss on their personal incomes taxes. There is complicated paperwork and the ownership of the different owners will decide their incomes from the profits.

Professional Corporation

This type of business includes all the advantages that a Corporation has but it is for professionals that are licensed by the state. This business entity does not hold the owners personally responsible for the malpractice of the other various owners. Each owner of the business must have the same profession as the others. The filings and paperwork that must be done are burdensome. Also, this business type can be expensive to organize.

Nonprofit Corporation

There are no federal income taxes paid on the income for a charity. The advantages of the tax benefits can only be used for charity and must be incorporated for a scientific, educational, religious, or literary objective. Any donors can deduct the donation from their federal income taxes. Any property that is transferred must remain in the corporation. If the nonprofit corporation ends, all transferred property must be to given to another nonprofit corporation.

Limited Liability Company (LLC)

The business owners will have a limited responsibility for the judgments, and the debts and other charges of the business. The profits and losses are divided among the owners. The owners are allowed to choose the tax structure: either a corporation or a business.

Professional Limited Liability Company

This type of business includes all the advantages that an LLC has but it is for professionals that are licensed by the state. All the owners must have the same profession.

You may want to work with an attorney to help select the best type of business to create and to guide you in other decisions for your business. An experienced attorney in business operations and business entities will guide you in the right direction.