Four Types Of Business Legal Entities – A business entity (sometimes referred to as a business structure or legal structure) is the basic foundation for starting a business. A business entity is basically how a business is legally organized to do business.
There are four main business entities to choose from, including sole proprietorship, partnership, corporation and LLC. Each type of asset has its own advantages and disadvantages such as liability exposure, costs and administrative requirements.
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Since many of the next steps in starting a business will depend on which one you choose, it is important to understand the differences in each and make your organizational choice early.
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ASole Property is an individual or married couple who decide to run a business for themselves. With an estimated 73% of U.S. businesses being a sole proprietor, this is the easiest to start, the cheapest to set up and the most popular of the four to set up. With this business structure, the person and the business are legally the same, so the owner of the company is personally liable for all debts and transactions of the company. This is called unlimited liability and is the biggest disadvantage of a sole proprietorship. This means the owner’s personal assets are potentially at risk if the business is sued. Business owners will also pay self-employment tax on all business profits and may pay more tax than other entities.
A Collective Partnership consists of two or more people who carry on business together. Like sole proprietorships, most states do not have formal filings. Also, partnerships, like sole proprietorships, have unlimited liability. Each partner’s personal assets are potentially at risk if the partnership is sued. The partnership itself does not pay tax on business income. Instead, gains and losses are transferred to the owner’s personal tax return. This income is subject to self-employment tax.
Company A is a separate legal entity from the person. Although corporations are more expensive and complex to set up and manage than sole proprietorships and partnerships, the biggest advantage is that the owner’s personal assets are protected if the corporation is sued. To provide liability protection to its owners, the company must hold and hold minutes of board meetings, shareholder meetings. All of this may sound absurd for a sole proprietorship, but it is important to protect the owner’s personal assets.
In the absence of self-employment tax, income to the owner comes from wages or dividends which can result in tax savings.
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A Limited Liability Company (LLC) is a popular business option. It provides liability protection for companies with operational facilities such as sole proprietorships. LLC board meetings, shareholder meetings, minute keeping, etc.
LLCs have additional advantages, such as having the highest tax flexibility among the four entities. Income can be taxed as a temporary entity, such as a sole proprietorship or partnership, or as a corporation to save self-employment tax. Not only is there more choice in how the business is taxed, but the way the business is taxed can be changed later as the business grows.
Feel free to download our asset comparison PDF to help illustrate the differences between sole proprietorships, partnerships, corporations and LLCs.
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I am thinking of selling a product I made at a craft fair. What do I need to do with the state of Iowa to start doing this?
The rules and regulations of setting up a business change frequently. While we do our best to keep this information completely up to date, it is very difficult to keep up with changes in each state. Additionally, this website is for informational purposes only and does not provide legal or tax advice. A sole proprietorship is an unincorporated business owned and managed by one person. It is the simplest form of business structure, as the business and its owners are not legally separated. It is also known as sole proprietorship, sole trader or sole proprietorship.
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A business owner, also known as a proprietor or merchant, conducts business using his or her legal name. They can also choose to do business under a different name by registering the business name with their local authority.
This type of business is the easiest and cheapest to start. Therefore, it is common among small businesses, freelancers and other self-employed people.
Although the process varies depending on the jurisdiction, establishing a sole proprietorship is generally a simple and inexpensive process, compared to forming a partnership or corporation[1].
Compared to other forms of business, property owners have less paperwork to file with local authorities. As a result, owners do not have to wait long to get permission to run a business.
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Starting salaries are also low, in line with many government policies that encourage entrepreneurs to take risks and grow the economy by minimizing the friction of starting a new business.
There are few government rules and regulations specific to property owners. Sole proprietors must keep, file and pay taxes on appropriate records of business income and other sources of personal income.
Tax recordkeeping and filing obligations are usually no more complex than keeping records for individual tax returns. Due to the time and effort, owners may want to pay for specialized software and consultants to ease the time spent on management.
For larger businesses and public companies, such as financial disclosure, government regulations require more management and do not apply to sole proprietorships.
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Owner, production, sales, finance, staff, etc. control all aspects of their business, including This level of freedom is attractive to many entrepreneurs, because the success of the business also means personal success.
To be successful, owners must be “good enough” in the various aspects of their business over which they have control.
Although some property owners are employees and delegate some of their authority, they are ultimately responsible for all of their business decisions and actions.
There is no legal separation between the owner and the business, so the owner receives 100% of the profits. Although all profits go to the owner, the tax is paid once and the owner pays the tax individually.
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Owners must pay individual tax on the income, for example as part of their annual individual tax return. Tax payments may be more frequent, for example quarterly, depending on local tax regulations.
Making regular payments can help landlords avoid their tax burden from becoming heavy and incurring tax penalties. Tax advisors can help owners estimate taxes so they can set aside enough profit to make mandatory government payments[2].
There is no legal distinction between the owner and the business. Just as all profits flow to the owner, all debts and liabilities belong to the owner.
If the business fails to meet its obligations, creditors can pursue the owner’s personal assets for repayment.
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This responsibility is spelled out in a legal document signed with the lender, sometimes called a promissory note. The owner is not required by law to provide a personal guarantee to a sole proprietorship, as both are the same legal entity.
Owners use their own resources when setting up a business for themselves. When they seek a loan relationship, there are limits to their financial resources and the amount of credit they can take.
Turning ideas into reality can be risky and expensive. Keeping a business running can be capital intensive. Some expenses must be incurred before income can be generated. Cash paid for sales on credit and expenses must be financed by working capital. Equipment and other long-term consumption resources required for the job should be rented or financed.
If the needs of the business exceed the resources and financing available to the owner, they need to carefully manage their working capital and potentially reduce the acquisition of fixed assets.
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A comprehensive business plan helps the owner determine the capital needed to start, maintain and grow the business.
If the owner is unable or unwilling to run the business, it will stop. The owner may have family members or trusted employees who can replace the owner for a short time in case of illness or any other temporary and unexpected reason.
Business interruption insurance can cover costs for long-term issues, but these policies cannot complete the work the owner does.
Without a separate legal identity, a sole proprietorship cannot easily transfer any intangible assets from one owner to another. Except for equipment and fixed assets,