If you're looking to start a business, it behooves you to understand the most common types of business entities. Understanding and choosing the right type of business entity can help you achieve your short term and long term goals, such as:
At John F. Dennehy CPA, we are a team of seasoned business consulting experts and certified public accountants. We offer the expertise to get to know you, your business goals, and guide you to the best type of business entity. Since we've opened our doors, we've helped a variety of businesses across in the New York and surrounding area successfully launch their enterprise.
If you have any specific questions regarding choosing the right business entity, don’t hesitate to reach out to our team today. In the meantime, keep reading to learn more about the most common types of business entities.
A sole proprietorship is when an individual owns an unincorporated enterprise with no legal distinction between them and the business itself. To put it simply, anyone who offers services and goods to others automatically forms a sole proprietorship.
The owner of a sole proprietorship is entitled to all profits associated with the business in addition to any debts or liabilities that result from business activities. Under this model, the owner is not taxed separately from the business. This means the sole proprietorship’s income becomes the business owner's income, causing a heavy burden on the owner if things don’t work out well.
A general partnership is a relationship between two or more people who decide to trade or do business together. Each person in the partnership shares the responsibilities associated with the business in addition to any profits or losses created by the business.
Like a sole proprietorship, business owners are personally responsible for filing the taxes associated with their business under their personal income tax. So, although the business itself does not have to pay any taxes, reporting the revenue or lack thereof is “passed through” to the owners’ tax returns.
Limited Liability Corporation
Limited liability corporations (LLCs) are when two or more people (known as members) plan to maintain a business together. Because most states do not restrict ownership, LLC members may include any combination of individuals, foreign entities, other LLCs, and corporations. It should also be noted that an LLC has no limit on the number of members it can have.
Similar to a partnership or a sole proprietorship, LLCs are not considered separate from its members for tax purposes. Instead, an LLC is referred to as a “pass-through entity.” When filing to form an LLC, you must file paperwork known as the articles of confederation with the state agency, pay a filing fee, and establish an LLC operating agreement that goes over the right and responsibilities of each LLC member.
Compared to other business structures, corporations are more complex. In short, a corporation (also referred to as a C-corporation) is an entity that is independent of the individuals (shareholders) who own or run the business. Due to this special legal status, the corporation itself is held legally liable for the profits, debts, and liabilities associated with the business and not the shareholders who run it.
Corporations are considered a safer investment than other types of business entities because they offer the strongest protection to shareholders from personal liability. Since corporations file their own tax returns, investors don’t have to worry about their personal tax return being affected. Another upside associated with corporations is they are relatively undisturbed if a shareholder decides to leave the company.
The cost to create a corporation is higher than other business structures, requires more record-keeping, can involve double taxation (once for profits and again when dividends are distributed to shareholders), and may have a more complex operating process.
S-corporations allow profits (and sometimes losses) to be passed directly to owners' personal income tax without being subject to corporate tax rates. Be sure to look into how your state taxes S-corporation before creating one because the rates vary from state to state. Some states tax S-corporations on profits above a specified limit while other states don't recognize S-corporations and treat them as a regular corporation instead.
If you want to learn more about how to form an S-corporation in New York and some of the differences between them and other business entities, don't forget to check out our blog that goes over all the details.
Contact John F. Dennehy CPA for the Most Common Types of Business Entities
When it comes to selecting your business entity, you can't afford to get it wrong. Instead of going at it alone, trust the experts at John F. Dennehy CPA. We are a team of experienced business consultants and CPAs who offer decades of experience.
Contact us today to learn more about common types of business entities.