One of the many facets of growing and running a business includes your business entity. Business entities are an organization created by one or more individuals to conduct business. When many small business owners start their business, they may identify as sole proprietors until they choose a different business entity.
Choosing an entity type really depends on how you want your business to function in terms of legal and financial implications, such as liabilities put on the business versus the owner. First, let’s identify the different types of entities that the IRS accepts:
A sole proprietor is an individual that owns a business by themselves. They are typically personally liable for anything that happens within the company, including taxes, and debts. This means if your company is involved in a lawsuit, your personal assets can be at risk. It is also difficult to fund a sole proprietor because there is no separation between the business and the individual. It is one of the most popular types of business entity in the United States because of how easy it is to set up, but it is much easier to fund a business with a different entity type.
A partnership is a business in which two or more people conduct business together, with each person contributing and being liable for the business. Individuals tend to start partnerships because they are easy to create and are a lower risk than a sole proprietor. There are a few different types of partnerships, including general and limited.
A general partnership does not require a lot of legal requirements like other forms of business entities that will be discussed, and each partner divides the profits and losses so not all of the liabilities are put on a sole person.
A limited partnership, unlike a general partnership, does require certain legal items. Individuals in a limited partnership tend to take on more of an investor role rather than equally dividing the liabilities. This can create more of a liability for certain individuals who may take on more within the business.
A C Corporation or “C Corp” is a registered business entity. In this instance, the liabilities of the company are within the business, not the owners. Meaning, if the business is involved in a lawsuit, the owner’s personal assets are not at risk. C Corps require legal documentation to remain within compliance with laws and regulations.
Businesses that register as a C Corp have access to more tax deductions and have the ability to offer stock options. However, C Corps can be fairly expensive to create, unlike the aforementioned entities. They also face double taxation, meaning the company pays taxes, then the shareholders (owners) pay taxes on their dividends.
An S Corporation or “S Corp” is another legally registered business entity. The main difference between an S Corp and a C Corp is taxation. Unlike a C Corp, an S Corp is not subjected to double taxation, however, like a C Corp, an S Corp’s liability lie within the company, not the owners. They can also be fairly expensive to create and much abide by certain laws and regulations to stay an S Corp.
An LLC does exactly what it says – it limits the liabilities of the business to be on the business instead of the owner. They are less expensive to create and require less documentation than an S or C Corp. LLCs are a popular choice among small business owners who want a step up from a sole proprietor or partnership entity. It gives them control over their business without worrying about the legal liabilities associated with a sole proprietor.
There are a few business entities to choose from for your business, and it all comes down to personal preference, or if there is more than one owner involved, a mutual agreement on the type of entity that will benefit the owners and the business the best. The largest items to consider are the liabilities, taxes, and paperwork requirements since each entity differ.
If you are a business owner looking to receive funding for your small business, we would love to chat! We offer a variety of different funding options, and we will make sure we find the right solution for your specific business needs. We know you are busy, so we have streamlined our process to make sure your funding experience is easy, fast, but most importantly, personalized. Speak with one of our dedicated funding advisors today to see what we can do for you.
This content is for educational or informational purposes only and should not be taken as legal or financial advice. The information in this content does not necessarily reflect the views of Coast Funding Services LLC or its partners.