Which type of business entity is suitable for your long run better success? What are the different types of entities?
Are you planning to start a business or invest all your efforts in any business, to show yourself to the business world? Most of us plan for getting good reputational own business.
We are all having a dream, without getting a business loan, to make millions of dollars.
Everyone has a lot of doubts in the following portions,
- What is the best form of business ownership in this present scenario?
- Which type of business entity gives better success in the long term?
- In tax basis, what is the best legal structure for taxes?
The types of business legal structures you choose, with or without knowledge, can either make or break you.
Why because different business structures having their own ways of operations and burdens too. Most cases burden come into the payment of taxes and different liabilities only.
In order to get or choose which one is suitable based on your interest, you need to understand different business entity structures and their pros and cons.
If you have a complete idea about different types of legal structures in business entities, you get an opportunity to make generous profits in entrepreneurship.
Business Entity Structures are best for you or different types of entities are
- General partnership
- Solo or Monopoly proprietorship
- Corporation (Either S or C type)
- Limited liability Partnership
- Limited liability Company
General Partnership Business Entity:
As we know partnership in business means entity owned and operated by two or more individuals.
All partners have contributed some portion of money in order to raise the required capital for setting up a business.
All are having their responsibilities in order to make the right decisions at the right time.
If the partners are might take a decision to allocate a different role in each of them, the performance and efficiency of the entity may boost.
Have a look on pros and cons, if you like to start a general partnership
- Less capital required: In this general partnership, the amount required to start a business is very less compare to start an own company. According to the ratio of capital contribution, the profits are shared among them at final.
- Easy to start: It may not take a long time form a group of partners. It does not involve any long legal procedures also.
- A Good consultation among partners: before taking any decision they might discuss with each other in order to take a final decision. This may lead to taking better decisions that improve the business entity.
- Fast Decision Making: If your business is having only two partners decision making is very fast. Even though having more you may call for the meeting and discuss among all and take decisions.
- Internal Conflicts: You may lose your identity if you more partners. And personal interests of a certain partner may reflect on your business entity and some conflicts may arise between partners.
- If liabilities are unlimited: In case business having debts and your business is unable to pay it, the personal assets of the partners are at risk of getting sold in order to clear off the debts.
Sole or Monopoly Proprietorship Structure
As per Statistics of experts, Solo proprietorship is one of the simplest forms of business organizations.
In this structure, the business entity can be established, controlled and managed by one person only i.e., the owner.
When you think become once own boss formulae this is suitable for you.
In this type of business, you are the key decision maker and all the losses and profits come to you only.
Businesses like shops, restaurants, canteens and boutiques etc come under this type.
1) Enjoys all the profits that the business gets.
2) Easy to start- no need for long legal procedures before establish
3) Sole and quick decision making regards business plans like quantities of commodities, business deals etc
4) Easy and simple to manage your business
5) More flexibility in your business means easily change your products and terms and conditions of your business
6) Freedom to sell any product at any time
1) Sole responsible or bare-able for all loses if any occurs
2) In case of the bankrupt, you may lose all your assets of the business or personal too (will be sold to clear off the debts)
3) You want to pay taxes on income (personal) because in this business you are the only boss
Corporation Business Entity Structure
Corporation business entities are having some set of rules and regulations. Basically, these entities are formed by some eligible set of shareholders.
These shareholders are electing some board of directors to look after the corporation day to day activities.
Board of directors having the powers of
- The decision makers- they take decisions to made benefits to the corporation and they support corporate objectives.
- Hire and fire of employees
- Ownership can be transferred from one party to another
- Raise the capital via the sale of stock in the stock market
- can buy and sale of real estate assets
As per corporation rules, the employees may have some obligations like the targets of the business entity are met within a stipulated time.
Corporation has the perpetual existence, which means that it can continue the operating even if the ownership changes.
If you want to start a corporation, you will be the main hand or major shareholder having more contribution with an authority to appoint as one of the directors.
Under the corporation by-laws (set of documents), directors are having the power to hire employees that will help to run the company in a profitable way.
If it required these by-laws can be modified for the company grows, after discussion in the annual meeting.
Corporations are divided into two types, those are
1) S- Type
2) C- Type
Before knowing about these two, we should know about the pros and cons of corporations. Because of, these S and C types are having their own pros and cons.
Pros of Corporations are
1) Owners are having limited liabilities, because of this if any debts cases, the assets of the owners are very safe and remains untouched by the creditors
2) Chances of escape from taxes or lower taxes, especially when the profits are shared
3) Ownership in a corporation can easily transferable
4) Sometimes, benefits may be deducted as business expenses
1) It is very expensive to set up compared to sole proprietorship and partnerships entities
2) It involves a lot of paperwork at the starting age. In legal works, the owner must file it with the secretary of state
3) Slow decision making involved
4) It having separate legal laws and hence it is entitled to pay taxes
Types of corporations are
Normally corporations (also termed as C type as distinguish them from S type) are in existence from ancient times. The word Corporation comes from the Latin “corpus” or “body.”
Subchapter S is added in the Internal Revenue Code (IRS) in business entity structure for segregation. An S corporation is a subset of a corporation. The IRS has a specific requirement to qualify to elect S corporation status.
1) The corporation must be a domestic one
2) It doesn’t have a foreign owner
3) Shareholders do not cross 100 no’s at any cost
4) It can issue only one cash of stock
When coming to taxes, S types are a tax pass-through entities. In this everything like losses, credits and any deductions are passing through to the owners.
The shareholders only pay taxes on their allotted share of income. And it is passing through the individual personal tax return.
Now a doubt may come across your mind. Which one is better either C or S type of Corporation?
Differences between S & C Types Corporations are
Both S & C are having the same protection against the lawsuits of the corporation. Because the activities of the corporation are separate from other.
Its liabilities cannot be legally transferred to its shareholders.
The owners (corporation’s shareholders) cannot be sued on behalf of the corporation. And they are not personally responsible for debts incurred by the corporation.
A small minute difference is between S & C types. Shareholders in C type (regular) corporation may receive shares or dividends of the corporation’s revenue. And they have a chance to sell their shares for a profit or loss at any time.
C type owners are having a double tax dilemma. Means corporation pays taxes on its profits and owners (shareholders) also pay tax on their dividends they received (personal income tax).
In an S type, the corporation does not pay dividends to its owners. And it shows its net profit or loss passed through to the individual shareholders. And it reported on their personal returns even if the owner actually not received in the form of dividends.
To avoid tax issues, most corporations try to convert their business property from C type to S type. It also is tricky and complicated.
Please discuss with your tax professional and your attorney before making a decision regarding your business entity status.
Limited Liability Partnership (LLP)
In this LLP every individual is having limited liabilities. But in general, partners are having unlimited liabilities.
In LLP, partners must file an application of registration with the secretary of state.
Nowadays every common business entity should apply for registration. In this partners (investors) run and operate the business. But those who run the show have a limited liability.
Pros of Limited Liability Partnership are
1) The formation process of LLP business entity is very simple, the only thing is it needs approval from the secretary of state.
2) In LLP, partners are having their own burdens. So they are not liable for any consequences or wrongful actions done by other partners.
3) The limited partnership is having a quick decision making.
4) Partners with the limited partnership, have the power to leave anytime without dissolving the partnership.
Cons of LLP are
1) More expensive to form it rather than general partnership
2) In the case of dissolving a partnership, it leads to affect personal interests between individual partners
3) In debt cases, partners may lose all of their stuff because partners are having unlimited liabilities
Limited Liability Company (LLC)
Compare to LLP, LLC business entity is having more powers and separate legal entity. Because it is a hybrid of both a corporation and a partnership.
LLC having exclusive rights like buying and owning of assets, sue or be sued and pass through taxation feature. This means single taxation only applicable i.e., on owners (personal income tax) just like in a partnership.
Unlike a corporation, it has no stocks in his hand and it does involve fewer formalities during the formation process.
The members of LLC are not called shareholders. They mention just members instead of shareholders.
LLC’s are having their own set of guidelines or rules referred to an operating agreement. This may be changed or modified at any time depends on business growth in specific time duration.
An operation of a limited liability company business entity is simple. And it only requires, to make or implement certain decisions, the members of LLC to meet once or twice a year.
1) It does not pay tax on company level means single taxation applicable. Taxes are passing through the members of LLC. They pay the tax as a personal tax later on.
2) LLC is having a high liability protection. Because of, members of LLC are having less liability on behalf of members. So assets are been untouched in debts cases.
3) It is easy to establish, compare to other corporations. Only thing is it requires some paperwork
1) Required more initial capital to establish LLC compare to other partnerships
2) It involves more legal procedure and paperwork too
Thus, an establishing a business entity structure it requires an entrepreneurial mindset. And they want to consider the above things i.e., the amount of capital, type of liability and easy formation methods.
These are the guidelines that one has to follow before deciding on a business entity for their ideas implementations