By : Travis Brenner
If you are starting a business, there are many important decisions you will need to make. Possibly the most important choice will be selecting the type of business entity in which the business will operate. Different business entities will offer different benefits but may also have some drawbacks. Below is a list of the types of business entities and a brief description:
- Sole Proprietorship: A sole proprietorship is run by a single individual. This entity has the greatest flexibility but offers no liability protection for the owner.
- General Partnership: A general partnership requires two or more persons who contribute money, skills, or labor to form a business. The partners will share equally in profits and losses, and will have equal rights in decisions making regarding the business. The partners will be personally liable for the debts the business incurs.
- Limited Partnership: This type of partnership requires one general partner and one limited partner. The limited partner(s) only contribute capital to the business and do not participate in operational decisions. However, the limited partner is only liable to the extent they contributed money to the partnership. The general partner(s) will function similar to a regular general partnership.
- Limited Liability Company (LLC): An LLC can be formed by one or multiple individuals. Other business entities may also form and participate in an LLC. An LLC is governed by an operating agreement which details how the business will be managed, how profits and losses will be split amongst the members, and the transferability of interests in the LLC. Members of an LLC are shielded from personal liability of the company’s debts. LLC’s must register with the Secretary of State.
- Corporation: A corporation is a legal entity that is separate from the individuals who form it. Ownership of a corporation is in the form of stock and the owners are called shareholders. Shareholders are not personally liable for the debts of the corporation. However, corporations are subject to double taxation (once at the corporate level and once when distributions are made to shareholders). Corporations are organized in a single state by filing Articles of Incorporation with the Secretary of State. It is more costly to form a corporation and requires a greater level of maintenance.
Some issues that people should consider when selecting a business entity include:
- The taxation of the entity
- The industry in which the business will operate
- The number of individuals in the entity
- The limited liability shield
- The cost of forming and maintaining the entity
- The flexibility for the owners
Selecting the proper business entity is crucial to the success of a business. If you have questions or concerns regarding the different business entities or would like assistance in forming your business entity, we can help at Hartung Schroeder.
ABOUT TRAVIS BRENNER
Travis has been a law clerk at Hartung Schroeder for the past year and will join the firm as an associate attorney upon completing his JD and MBA at Drake University. Some of his experience includes assisting clients with forming nonprofit organizations and other business entities as a student attorney in the Drake Legal Clinic. In the future, he hopes to develop a real estate practice that will complement the firm’s diverse areas of practice.