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What are the Different Types of Business Entities?

By Osmand Vitez
Updated May 16, 2024
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When an entrepreneur decides to start a new business, he or she must choose among a variety of business entities. The most common types include a sole proprietorship, partnership, corporation, and limited liability company. They range from easiest to most difficult to start and maintain. Each entity has a specific taxation method, management organization, and liability structure. Among the business entities, proprietorships and partnerships typically have the least protection, while corporations and limited liability companies have more.

A sole proprietorship is the easiest business form to start. An individual simply needs a business license or other credentials provided by the local government. With this information, the individual can set up a business banking account and begin operations. All income earned through the business flows through to the individual’s personal tax return. The business owner has full liability for all his or her actions and the employees who work for the company. Many small, home-based businesses use this organizational form to start operations and may move to a different form later.

Partnerships are the next level among business entities. Partnerships are general or limited; a limited partnership has one individual who provides funds but provides no services for the firm. The company splits income among the partners based on the start-up paperwork filed with the government. All partners are liable for each other’s actions. Income flows through to each partner’s individual tax return.

Corporations may either be C or S in designation. These business entities allow for corporate or personal tax returns, respectively. The entrepreneur will need to file the articles of incorporation with the local government and elect C or S for the new corporation. A C corporation requires that all income filed on a corporate tax return separate to all individuals in the business. S corporations call for income to flow through to personal tax returns; this form is best, in most cases, for small businesses. Both offer full liability coverage, protecting individual assets from business issues.

A limited liability company is a hybrid between the partnership and corporate business entities. It allows for business income to be taxed at personal rates, saving owners money. The company can also have some aspects of a partnership, where activities by each individual may be limited by personal investment levels. Not all governments recognize the limited liability company business form. Starting a business using this form may involve several different complications depending on the type of operations involved in the company.

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Discussion Comments
By surfNturf — On Jul 13, 2011

@Mantra -I think that is a good idea. I would make sure that you also have a legal agreement between your partner and yourself in case there are any disputes later on. I know a lot of people that form partnerships usually go with a limited liability company or an LLC. The advantage here is that you get to file under your personal income taxes and can save a little money.

You also might want to look at a nonprofit group called SCORE. This organization is made up of entrepreneurs and retired business executives that mentor new business owners like yourself. You could be matched up with a counselor that has had experience operating a daycare which would be really helpful. Good luck to you.

By mantra — On Jul 13, 2011

I am going to start a daycare business with a partner next year. I have been reading all sorts of resources, but am still behind the curve when it comes to figuring out taxation of business entities.

I have been trying to figure out the best type of business entity for a daycare business with a partnership. I think I need to talk to an accountant or maybe an attorney who can explain what I should expect when it comes to business taxes.

This is a new endeavor for me. I have never run a business before. Fortunately, my partner has more experience. I think I will check out the secretary of state website, too. I bet I will find some resources there.

By OhDeDoh — On Jul 12, 2011

My dad recently bought a semi truck with water tanks. He has been driving a water truck for a company working at the oil fields in North Dakota. The potential for an owner/operator is great so when he had the opportunity to buy his own truck, he knew he couldn’t miss it.

After researching the different business entity types, he and my mom decided a limited liability corporation would best suit their needs.

Our state secretary website has all the information and links for the steps to obtain an LLC. It has printable forms, fee schedules, certificates of existence, and more. After he got his certificate of existence, he got an employer identification number.

Now we are just waiting for a little work to be done on the truck and he will be ready to start working for himself.

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