Starting a new business is hard work. There are many considerations to make and one of these is what type of legal entity you are going to choose.
The IRS lists six different legal entities for you to consider, but there are really eight. Reading the information given by the IRS can help you understand your legal responsibility for the one that you choose.
A Look at the 8 Different Legal Entities
Non-profit organizations are intended to help a group of people in some way. There is no monetary gain for this type of company and individuals do not receive any share of the profit but instead it is put back into the business. These are sometimes the hardest businesses to find success with but they do have a lot of tax benefits.
A corporation is separate from its owners. This means that it is considered an individual or its own entity when doing things like filing taxes or applying for loans. You can be non-profit or for profit and be a corporation. The corporation is allowed specific rights like being able to sue and enter into legally binding contracts. Each corporation in the US is required to have an elected board of directors and to sell stock. If a corporation is ran by an individual they can appoint themselves the sole member of the board of directors and issue themselves stock options.
This is a business that has one owner who runs it completely on their own. The owner takes on full responsibility of the business and all debts. They are rewarded with 100% of the profits and gains. Many businesses start as a sole proprietorship and grow to be one of the other larger entities.
A general partnership is a group of individuals who are responsible for debts on a business that they run and operate together. Individuals risk losing their own personal property (it can be seized) if the business goes under or does not pay its debts.
Limited Liability Company
A limited liability company (LLC) can avoid being taxed twice (or double taxation) and having liability protection. The company can have a number of different types of ownership and distribute them to different companies, partnerships, and individuals. It can be complicated and expensive to start a LLC.
A limited partnership has two different types of partners. There are the general partners who are able to make management decisions but are expected to be liable if the company were to go under. The limited partners are relieved of any liability but they are not able to make management decisions either. They are often called silent partners.
An S corporation has some advantages over a corporation in that they are not privy to double taxation and they have a liability protection. These businesses can have no more than 100 individuals who own shares. Only US citizens can own the stock and they must limit shareholders which can make it harder to make a profit.
Limited Liability Partnership
This is a business run by a group of individuals who share some liability. Most professional partnerships operate in this way. This type of business does not have double taxation and allows partners to only be liable for their own actions in a lawsuit.
Choosing the right option can be very overwhelming. The good news is that you can learn about the different types of legal entities for your business and discuss what would be best for you. Talking to a trained professional and having them review your situation will help you to succeed.