What Entity Type Should An Entrepreneur Choose for Their Business?

The period during the planning and brainstorming of a new business is a heady and exciting period. Many starry-eyed dreamers have started a business venture with visions of success. We at SBEMP understand how exciting this time is and want to help entrepreneurs understand the practical side of registering your business as a legal entity. What confuses entrepreneurs is trying to decide which business entity to choose. Our Coachella Valley business transaction law firm advises on this detail for new businesses founded in the Coachella Valley.

Start with a Business Plan First

Setting up the business entity is part of coming up with the business plan. This determines questions such as how the profits are divided, what liability belongs to whom, how the business is taxed, what permits it has to obtain, and what legal rights and responsibilities are attached to the business ownership.

There’s four principle business entity types:

Sole Proprietorship

This is the most common option for lone entrepreneurs. It’s easy to create and maintain – the sole proprietor is cleared to make all decisions regarding how the business is conducted in regards to financial, operational, and legal matters. However, the sole proprietor is also saddled with all liabilities from taxes to legal responsibilities. Sole proprietors might be blue-collar professions such as plumbers and repairmen, or small business storefronts such as agencies or auto repair shops.

Partnership

A partnership is simply a sole proprietorship built for two or more. This is the typical arrangement for inventors, investors, retail establishments, and other small businesses such as restaurants or garage-tech startups. As with a sole proprietorship, the business owners have both all of the power to make decisions for the business and all of the responsibility for legal liabilities. Partnerships are also easy to create, and may have some tax advantages.

Corporation

A corporation is probably the framework that the average layman is most familiar with. To incorporate means literally “to make a new body,” which is exactly the intent of a corporation. Separate from the business founders, the corporation is treated as a separate legal entity, with its own obligations, liabilities, and interests. These require the most paperwork and management to set up and maintain; however, they also provide the greatest benefit in tax accounting and legal conduct, as no one person can be solely responsible for the corporation’s actions. Corporations are aimed to scale big and grow, being the choice of necessity for any chain retailer, interstate agency, or multinational business.

Within the category of corporations, there are domestic profit corporations which are publicly traded among shareholders, non-profit corporations run on donations and volunteers, and regular profit corporations, which are expected to be a profitable business but do not attenuate obligations to stockholders.

Limited Liability Company

Limited liability companies are a half step between proprietorships and corporations. They are formed for profit purposes, while still limiting tax and liability exposure for the proprietors. They typically have most of the powers granted to a corporation. Limited liability companies are the typical choice for white color professions such as medical, legal, and clergy.