Which Type of Business Entity is Best for me? Part One
In this two-part series, we’ll discuss the differences in the following business entities: Sole Proprietorship, Partnership, and Limited Liability Company.
Congratulations! You want to start a business. You’ve perfected a million dollar idea and are excited to hit the ground running. You’ve fine tuned your process, know who your target market is, and maybe even how to get initial funding. But what type of entity should you create?
Maybe you and your partner have decided on a partnership. Or perhaps a limited liability company (LLC) will work best. You may decide that a corporation makes the most sense. But which kind of corporation? In deciding which business entity will work best for you, consider the following questions:
- Do you want to [or should you] own the business yourself?
- If you want an entity separate from yourself, what level of personal liability do you want to carry?
- How do you want your entity to be governed?
- What tax considerations are important to you?
If you choose to own the business yourself and be involved in the day-to-day decision-making, a sole proprietorship (one owner) or partnership (two or more owners) may be the best option for you.
A sole proprietorship offers the simplest entity form for a business owner. It is not a legal entity, rather, the term refers to a person who owns a business and is personally liable for the debts and obligations of the business. This is a popular entity form due to its nominal cost and ease of operation. However, the main disadvantage to this form is that the individual owner of the business remains personally liable, which means that creditors may bring lawsuits against the individual, who may be obligated to pay for debts from their personal accounts.
Partnerships are created when two or more people create a business for profit. Partners may retain any share of ownership, but at the end of the day, the percentages must equal 100 percent. The first step in forming a partnership involves creation of a partnership agreement. This agreement determines each partner’s share of the business. Regardless of the percentage, partners split management duties equally. Partners may share the business’ profits and losses equally, or provide for division based on the percentage of investment capital from each partner. Partners are personally liable for the partnership’s debts and the actions of the other partner(s). This means that creditors may come to you, personally, for the satisfaction of partnership debt. One partner may also be responsible for the promises and business decisions the other partner has made. There is no registration requirement for a partnership.
Stay tuned for part two of this blog series, focusing on Limited Liability Companies and Corporations and the differences between the two.