Types of Business Entities and How They Affect You

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The kind of business entity you choose – whether it’s a sole proprietorship or a general partnership or LLP, corporation or a limited liability company will affect your legal protection against lawsuits and business debts. It also affects how your business’s taxation is handled and the amount of paperwork that you have to complete. Your business entity choice can also affect your ability to secure a small-business loan and your ability to attract investors.

While state government recognize more than a dozen types of entities, the majority small-business owners will be registered as one of six: the sole proprietorship general partnership, limited liability partnership or limited liability company, S corporation or C corporation. In most states, you’ll have to pay a nominal fee and submit the required paperwork with the state agency you are registered with to establish your entity structure.

When you’re a brand new businessperson, one of your most important decisions will be the type of entity you select. The choice you make will have a major impact on your legal and financial exposure, so you must consult with a business lawyer and accountant to get advice that is specific to your company.

For instance, an LLC is a preferred entity for self-employed persons because it combines the tax and liability features of a limited partnership and corporation. It is flexible in the way the company is run and its size, the method of ownership and the types of owners or investors. It also has the pass-through taxation system which means that profits are declared and counted in the members’ gross income. They are then accountable for paying taxes on them.


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