Choosing the Right Business Entity

January 31, 2024
Ryan Colquhoun

When creating your business, often called business formation, choosing the right business entity is a critical decision that can significantly impact the success and operations of a business. Whether you choose to be a sole proprietor, a partnership, or something else, your business structure will influence everything from taxes to liability, so it’s essential to consider your options carefully. There are several business entities, each with advantages and disadvantages.

What Are the Most Common Types of Business Entities?

The most common types of business entities are:

  • Sole Proprietorship
  • Limited Partnership
  • Limited Liability Partnership
  • Limited Liability Company
  • Corporation (S Corp or C Corp)

One of the most straightforward business structures is the sole proprietorship. In this legal structure, a single individual owns and operates the business. While this business entity is simple and easy to set up, it comes with the drawback of unlimited personal liability. This means the owner’s assets are at risk if the business deals with legal or financial issues. Sole proprietorships are common for small businesses with low risk and minimal regulatory requirements.

A partnership is an option for people looking to share ownership and liability. Partnerships can be general, where all partners share equally in profits and losses, or limited, where some partners have limited liability. It’s crucial to have a well-drafted partnership agreement outlining roles, responsibilities, and profit-sharing arrangements to avoid conflicts down the line.

A common choice for small to medium-sized businesses is the limited liability company (LLC). An LLC combines a sole proprietorship’s simplicity with a corporation’s limited liability protection. Owners, known as members, enjoy protection for their personal assets while benefiting from pass-through taxation. LLCs offer flexibility in management structure and are relatively easy to form.

Corporations are another common business entity known for their separate legal existence from their owners. Shareholders own the corporation, and a board of directors oversees its management. Corporations provide strong liability protection but have more administrative requirements and formalities, making them suitable for larger, more complex businesses.

It’s essential to note that sole proprietorships, partnerships, and LLCs often pass profits and losses to the owners’ tax returns. This is known as pass-through taxation. On the other hand, corporations may face double taxation (unless a subchapter s election is made), where the company is taxed on its profits, and shareholders are taxed on dividends received.

Other factors to consider include the cost of formation, ongoing administrative requirements, and the ability to attract investors. The decision regarding the right business entity should align with your long-term goals, risk tolerance, and the nature of your business.

Contact One Oak Legal

Selecting the right business entity requires careful consideration of various factors. Whether you elect to establish a sole proprietorship, partnership, LLC, or corporation, each structure has advantages and disadvantages. It’s advisable to consult with legal and financial professionals to ensure that the chosen business entity aligns with your specific needs and goals. Contact One Oak Legal to help you make the right decision about establishing your business entity.