Forming a business marks the start of a challenging and potentially prosperous adventure for would-be entrepreneurs. As a first step, business founders should familiarize themselves with the issues and considerations involved in selecting a business entity, entering into business agreements, hiring employees and understanding the municipal, state and federal laws that regulate their business.
Below are different types of business entities you could form and a brief description of each. Please note that the laws affecting these business entities vary depending on state laws. You should consult an attorney before forming your new business.
1. Sole Proprietorship:
A type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. The owner is in direct control of all elements and is legally accountable for the finances of such business. The owner receives all profits (subject to taxation specific to the business) and has unlimited responsibility for all losses and debts.
A type of business entity that exists between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business. The assets of the business are owned on behalf of the other partners, and they are each personally liable, jointly and severally, for business debts, taxes or tortious liability. By default, a partnership will terminate upon the death, disability or even withdrawal of any one partner. However, most partnership agreements provide for these types of events, with the share of the departed partner usually being purchased by the remaining partners in the partnership. Partnerships can be further categorized as limited partnerships and limited liability partnerships.
3. Limited Liability Company:
A Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner.
A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs. Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees. For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high quality employees.