Business Entity Types

By Tom Loonan | Business Formation

So you have made the decision to start your business and begin down the exciting path of entrepreneurship. You’ve determined your product or services, researched the market and developed your plan. Now, before you can take the next steps toward making your dream a reality you must determine how you will form your business entity.

The determination of how to organize an entity is one of the most important decisions a business owner will make as they begin their endeavor. The chosen entity is the vehicle in which all operations occur that carry the business forward. The entity formalizes business operations and gives off the professional appearance while also providing the owner with certain tax advantages and liability protections. Just like choosing from the car lot, there are several options and models to choose from.

The four most common business entity types are:

1. Sole Proprietorship

Formed by a single person or married couple. Easiest and most flexible of the entity types, but also provides the least amount of protection for the owners, leaving them liable for debts and liabilities incurred by the business. Learn more about sole proprietorships.

2. Partnership

There are two types of partnership structures, general partnership and limited partnership.

a. General Partnership: Usually formed by two or more people. Partners agree to share profits, losses and management and like a sole proprietorship the partners are each personally liable to debts and liabilities of the business.

b. Limited Partnership: Formalized partnership where there are two types or partners a general and limited. The limited partners have no control over the operation of the business and are shielded from business liabilities. The general partners(s) must pay self-employment tax and take on the management, operation and liabilities of the business.

Learn more about partnerships.

3. Limited Liability Company

The most commonly formed entity due to the flexibility of management and ease of operation coupled with the strong liability shield provided to its members. An LLC also allows members to choose how the entity will governed. Learn more about LLCs.

4. Corporation

The most formal of all the entities and the most complex to operate. They must select a board of directors who are responsible for the management of the entity in accordance with the by-laws. Corporations are separate legal entities with their own identity and tax structure separate from the shareholders. The Corporation provides a strong liability shield to the shareholders. For more information on corporations.

The decision of which entity best serves the needs of a business is personal to each specific endeavor. There is no one-size-fits-all and business owners should give careful consideration to these distinctions and discuss with an attorney prior to launching. Learn more about Corporations.

Contact us today if you have questions about this topic or if you need assistance determining what business entity may be right for you.

You can also call our Stillwater, MN office at 651-439-2878 or Hudson, WI office at 715-386-3733.

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