Types of Business Entities and Which to Pick

Posted on 3/29/2022, 2:54:38 PM

Choosing the proper business structure is one of the most important parts of your business, and whether you want to start a business or already run one, you can’t miss out on this important process. In essence, the three most common business entities are sole proprietorships, corporations (S and C, mostly), and LLCs. 

If you’re looking for a detailed explanation of each to start your selection process for your business, this article will come in handy. Below you can read about the different types of business entities and how to pick the right one for you.

The Importance Of A Business Structure

Structuring your business properly is essential to ensure your and others’ stability. Each business entity has its own advantages and disadvantages when it comes to paperwork, profit, exiting, and other important factors. Filing your business under the best structure possible can make or break your work, as well as compromise your liability and the possibility of accessing your income when you need to.

If you want to know which business entity to pick, take a look at the following for detailed information about each so you can start considering your options according to your business needs. 

Corporation

A corporation is one of the most common types of business entity. It is an entity completely separated from its owners, meaning that a corporation has its own sets of legal rights independently from its owners. There are a few types of corporations, including C, S, B, nonprofit, open, and closed corporations, in which the filing fees vary depending on which one you choose.

In essence, C corporations are the ones owned by shareholders and taxed as separate entities, as well as they have an unlimited number of investors. On the other hand, S corporations were created for small businesses, where owners have, similarly to LLCs, limited liability protection. 

The most frequently filed corporations businesses choose are S and C. The benefits of S corporations rely on no corporate income tax, limited liability, and not having to pay payroll tax on an owner’s distribution. Whereas some of the cons of such have to do with having some complicated processes, operations, and being updated on every governance rule. As for C corporations, they benefit from liability protection, can sell shares to increase their profit as well as offer shares to attract clients. On the other hand, they have double taxation and are a bit complicated to maintain, not to mention the expensive taxes and fees.

Sole Proprietorship 

A sole proprietorship is the easiest type of business entity you can file for. You are, technically, a sole proprietor from the beginning so there’s no legal requirement to file your business under this entity name. A sole proprietorship means that you’re the only one responsible for your business's profit and debts. 

If you’re just starting with your business perhaps this is the best option for you thus you don’t have to worry about specific paperwork or expensive fees/taxes. Further, many owners tend to file for an LLC once the business has expanded, so there’s no limit or anything that can stop you from switching from one business entity to the other. But, a thing to consider is that, since the business is not technically registered, you lack government protection. Therefore all liabilities extend from the business to you.

The benefits of filing for a sole proprietorship include low costs, depending on your state of residence, tax deduction (if you’re eligible for specific business tax deductions), and easy exit, thus it is as easy to form the sole proprietorship as well as exiting it without the need of formal paperwork.

LLC (Limited Liability Company)

A Limited Liability Company is one formed by various members or groups of them, and that allows them, as well as partners and shareholders to limit their personal obligations while taking advantage of the partnership's tax and flexibility benefits. The owner's personal assets cannot be used to pursue legal claims against the company, which is why most owners decide to file their business as an LLC.

LLCs benefit from not having to equally divide profit and losses, therefore they are slightly different from other types of business entities. The cost of forming an LLC depends on the state filing fees mostly, in which both small and large businesses (this last one in fewer quantities) choose this taxing composition.

The thing about LLCs is that, if filed properly, you can get the most out of their benefits such as limited liability and a new level of flexibility when it comes to taxes. Although, some of the disadvantages of LLCs are that they need to be strictly set upright to be able to enjoy said benefits and that they do have a few more formalities than other types of business entities such as a partnership and sole proprietorship. 

How To Choose The Right Business Entity

Choosing the proper business structure is not something you can do in a second, thus it requires a lot of thinking and searching for important information to make sure you and your business are both protected from possible harm. 

Mentordial is a first-class mentorship company that allows business professionals and entrepreneurs to book a 30-minute call with a professional mentor. Offering quality and unmatched knowledge for you and your business, Mentordial understands how important it is to take the first step for your business and dream, which is why we focus on providing only the best and most qualified mentors for you to engage with.

Contact us to start getting a quality mentorship and watch your business grow and succeed as you’ve always dreamed about.