An Overview of Different Types of Business Entity Types

When launching your business, one of the first things you need to do is choose a business entity type. Choosing the right business entity type is important. The business entity type you choose will determine the amount of personal liability you assume and how you will be required to compensate your employees. The decision will also have tax implications for your business.

There are pros and cons of every business structure. Before choosing one, consult an experienced business attorney in Santa Rosa. Your attorney will help you effectively weigh the pros and cons of each type, paving the way for better decision making.

Here are some common business entity types.

Sole Proprietorship

As the name suggests, a sole proprietorship is a one-person show. It is the simplest business structure. In a sole proprietorship, there is just one owner who controls the business. They are in the driver’s seat and make all important business decisions.

In a sole proprietorship, the business and the business owner are considered one and the same. The business owner pays taxes on the profits earned. They take home all profits and are responsible for business debts, losses, and liabilities.

The biggest downside of the business structure is that the business owner has unlimited liability. If the business takes a loss and the business does not have enough assets to pay off its debt, the business owner may have to use their personal assets to satisfy creditors’ claims.

Partnership

When two or more individuals come together to start a business, a partnership is formed. In a partnership, the partners share business profits, losses, debts, and liabilities. Every partner files their own taxes for their share of the profits and also separately reports their losses.

There are two types of partnerships-general and limited. In a general partnership, the partners share business profits and losses equally. In a limited partnership, some partners may have a lesser share in business profits and also assume lesser liability than other partners.

C and S Corporation

A C corporation typically has several owners-known as shareholders. It is run and managed by a board of directors and management. A C corporation is a separate legal entity, which means the business and not the owners are responsible for business liabilities and debts.

C corporations are subject to double taxation, meaning that the business pays taxes twice-once when it is created and then again when it is distributed among shareholders.

An S corporation is similar to a C corporation with one basic difference. Unlike a C corporation, an S corporation passes on business income, losses, credits, and deductions to the shareholders who are required to report this information to the IRS.

Need help choosing between two or more different business entity types? Johnston & Associates Law has got you covered. We help businesses understand the legal and financial implications of different business entity types. To make an appointment, call (707) 545-6542.