Business Entities Part 1: An Overview
This will be a five-part overview of the different types of business entities, spread out over several weeks. Part 1 will cover the general topics that apply to all business entities. The remaining parts will each focus on a different type of entity.
The Types of Entities
There are four main types of entities: (i) the sole proprietorship, (ii) the partnership (both limited and general), (iii) the corporation (both C-corp and S-corp) and (iv) the limited liability company (LLC).
What is a Business Entity?
A business entity is a legal tool used to conduct business. Each business entity carries a different legal definition to your company. There are different tax and non-tax considerations for your business depending on the entity you choose.
Non-Tax Considerations: the Corporate Shield
The most significant non-tax consideration pertains to the corporate shield. Traditionally, a business owner is personally liable for the liability of their company. This liability includes lawsuits against the company and debts incurred by the company. For example, if the business does not have enough assets to pay off a debt, the owner of the debt can come after the personal assets of the business owner, such as his house, car, etcetera.
The corporate shield (there is also such a shield for LLCs) is a legal mechanism that protects business owners against being personally liable for liabilities of their business. This means that a debt or lawsuit of the business will not be paid from the personal assets of the business owner. However, keep in mind that the shield does not protect the business owner if the business owner is personally the cause of the debt or lawsuit. As an example, if the business owner accidentally hurts a customer, that customer can sue both the business and the business owner.
Tax Considerations: Double Taxation
The most significant tax consideration pertains to double taxation. This issue arises when dealing with C-corps, what is generally known as a corporation. In a corporation the earnings and profits are taxed, then the after-tax earnings and profits are taxed a second time when they are distributed to shareholders as dividends, hence the term double taxation.
There are other considerations to take into account when choosing the type of business entity for your company. For example, there are restrictions on who can be an owner of certain types of business entities and the minimum and maximum number of owners for certain types of business entities.
Each of the parts of this overview that follow will cover one of the business entities mentioned above and explain the different tax and non-tax considerations in relation to that business entity.
Information on this site was believed to be correct at the time of posting. Also, readers should be careful about relying on any information found online. Please consult a lawyer to ensure accurate compliance of the law within your jurisdiction.