Know More About Types of Business Entities to Consider
Apart from a sole proprietorship, there are several other business entities that could be a better fit for your company. These entities offer limited liability, meaning your business’s assets are considered separate from your personal assets, thereby protecting your personal assets in the event of fines or lawsuits.
Limited liability company (LLC)
Unlike a sole proprietorship, this business structure protects your personal assets from any legal trouble your LLC may face, meaning you aren’t held personally responsible if your business is sued. An LLC is also known as a “pass-through entity” because business income isn’t subject to a corporate income tax. Instead, profits are taxed as personal income only when paid out to the owner or owners. In other words, company income “passes through” to owners and is then subject to personal income tax rates.
A partnership is when two or more people share ownership of a business.
“If you have friends that want to pool in their money, you can opt to form a partnership,” said Jeremy Harrison, founder of Hustle Life. “It gets a little bit complicated because you need to agree with all the partners to come up with the stipulations and agreement.” [See related article: How to Create a Partnership Agreement]
Corporations are considered separate entities from their owners. There are five kinds of corporations: C corporations, S corporations, B corporations, close corporations and nonprofit corporations. Each of these corporation types has different requirements regarding governance structure and taxation.
There aren’t mandatory steps you need to take to file as a sole proprietorship, but you may want to file a doing-business-as application and get an employer identification number to register as an official business.
In addition to sole proprietorships, other types of business entities include limited liability companies, partnerships and corporations.