Today . . . I am thinking about this question that came in from one of our readers. She is just starting up her business and wants to know what the different business entities are and how to decide what business entity is best for her.
If you have a small business question that you'd like for me to answer, let me know.
Q: "How do I decide which business entity is best for me?"
A: This is a great question and very important consideration for both small business owners just starting up and those wishing to expand.
Here is a brief overview of the seven main business entities available in the U.S.:
These are the simplest and consist of one person who has total control, liability, and rights to sign contracts. No state registration or other formalities are needed.
2. Partnerships with General Partners
These consist of two or more persons equally co-owning a business for profit. Partnerships with general partners can be created without a written agreement. However, it is best to have a written agreement regarding what each partner is responsible for.
3. General Partnerships with Limited Partners
These are formed by two or more persons when the partnership has one or more general partners (someone active in the business and liable for it) and one or more limited partners (an investor who is not involved with the day-to-day management of the business and not liable for more than his or her investment in the partnership).
4. Limited Liability Partnerships (LLPs)
These are formed by two or more persons who file a statement of registration with the state. LLPs provide liability protection for both the general and the limited partners. It is best for LLPs to have a partnership agreement.
5. Limited Liability Companies (LLCs)
These are formed by one or more persons filing articles of organization with the state. LLCs have few required legal formalities. LLCs should have an operating agreement.
6. C Corporations
These are formed by one or more persons and have articles of incorporation filed with the state. They also have bylaws and corporate minutes and may also have a shareholder's agreement.
7. S Corporations
These are formed by one or more persons who want to be organized like a C Corporation but taxed as an S Corporation, such as a partnership with a shareholder liable for entity income and losses and the corporation not liable for taxes.
When determining what's best for you and your business, consider the following:
- How easy or complicated do you want the set-up to be?
- Do you need liability protection?
- Do you to have outside equity investors?
- Do you want your business to be taxed on the individual or business level?
- Will you have stockholders?
- Are there numerous or just a few owners?
For example:
- Sole Proprietorships are easy to create and manage. They have no liability protection to their owners and cannot have outside equity investors, but they can take out loans. They are taxed at the individual level.
- Limited Partners and LLPs provide personal liability protection. They also allow equity investors. They are taxed at the individual level.
- C Corporations are best for entities with numerous owners and public investors. Taxes are paid at the entity level and on shareholder dividends.
That's it!
Do you have any other suggestions? If so, leave a comment and let us know. And, if you have a small business question that you'd like for me to answer, let me know.
Susan L. Reid
The original Accidental Pren-her™
Award-winning author of Discovering Your Inner Samurai: The Entrepreneurial Woman's Journey to Business Success
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