Understanding the different business entities

One of the first decisions you make as a business owner is to determine how you want to register your business.

There are four main types of business entities, each with advantages and disadvantages.

Sole proprietorships

A sole proprietor is, as the name implies, the single owner of an unincorporated business. This is common for freelancers and consultants because sole proprietorships are simple and do not require registration with the state. Filing taxes is also relatively easy. However, as the only person involved in the business, you are responsible for debts and liabilities.

Partnerships

Partnerships have two or more owners and come in two forms: general and limited. In a general partnership, both partners are active participants. Both owners are personally liable for debts and liabilities.

Limited partnerships require state registration. Additionally, not all owners are active participants in the business. A limited partner is typically an investor with no control over operations.

Limited liability companies

LLCs offer liability protection and can be one or more owners. You also have the option to choose whether the IRS treats your business as a corporation or a pass-through entity on your federal taxes. Many small business owners choose to register as LLCs.

Corporations

A C corporation consists of a board of directors, officers and shareholders. Shareholders are the owners, and they are not personally responsible for debts related to the business. S corporations are more expensive, but registration allows you to avoid corporate and double taxation.

Careful consideration goes into choosing the correct business entity.