Types of Business Entities (2024)

Sole Proprietorship

This is a business run by one individual for their own benefit. It is the simplest form of business organization. Proprietorships have no existence apart from the owners. The liabilities associated with the business are the personal liabilities of the owner, and the business terminates upon the proprietor's death. The proprietor undertakes the risks of the business to the extent of their assets, whether used in the business or personally owned.

Single proprietors include professional people, service providers, and retailers who are "in business for themselves." Although a sole proprietorship is not a separate legal entity from its owner, it is a separate entity for accounting purposes. Financial activities of the business (e.g., receipt of fees) are maintained separately from the person's personal financial activities (e.g., house payment).

Partnerships–General and Limited

A general partnership is an agreement, expressed or implied, between two or more persons who join together to carry on a business venture for profit. Each partner contributes money, property, labor, or skill; each shares in the profits and losses of the business; and each has unlimited personal liability for the debts of the business.

Limited Liability Company (LLC)

An LLC is a hybrid between a partnership and a corporation. Members of an LLC have operational flexibility and income benefits similar to a partnership but also have limited liability exposure. While this seems very similar to a limited partnership, there are significant legal and statutory differences. Consultation with an attorney to determine the best entity is recommended.

Corporation

A corporation is a legal entity, operating under state law, whose scope of activity and name are restricted by its charter. Articles of incorporation must be filed with the state to establish a corporation. Stockholders' are protected from liability and those stockholders who are also employees may be able to take advantage of some tax-free benefits, such as health insurance. There is double taxation with a C corporation, first through taxes on profits and second on taxes on stockholder dividends (as capital gains).

Small Business Corporation (S-Corporation)

Subchapter S-corporations are special closed corporations (limits exist on the number of members) created to provide small corporations with a tax advantage, if IRS Code requirements are met. Corporate taxes are waived and reported by the owners on their individual federal income tax returns, avoiding the "double taxation" of regular corporations.

Advantages/Disadvantages

Sole Proprietorship

Simplicity of organization-this is the most common form of business organization in the United States because it is the easiest and least expensive to establish.
Minimum legal restriction-fewer reports have to be filed with government agencies. There are no charter restrictions on operations.
Ease of discontinuance-the business can be terminated at the will of the owner.
The owner is truly the boss, making all decisions, keeping all profits, and assuming responsibility for all losses and debts.
Difficulty in raising capital-this can be a problem since an individual's resources are typically less than the pooled resources of partners.
Limited life of the business-untimely, unanticipated, or unplanned removal of the proprietor from the operation of the business may have ramifications for creditors.
Unlimited liability-this is by far the greatest disadvantage to the proprietorship. Even though proprietors may invest only part of their capital in the business, they remain personally liable to the full extent of their assets for the liabilities of the business.

Partnership

Greater possible capital availability
Greater resources for decision making, support, creative activity
Unlimited liability in general partnerships
Divided authority-having to divide the authority for making decisions among the partners can delay the decision-making process and occasionally lead to disagreement.

Limited Liability Company

Allow greatest flexibility for customizing the structure of the business
Limits member liability
In many states, an LLC may have only one member (have the benefits of a sole proprietorhop but limits liability).
Requires comprehensive operating agreement because of the high degree of variability/flexibility

Corporation/S-Corporation

Limited liability to stockholders-liability is limited up to the amount invested personally in the business. In addition, personal assets may not be seized by creditors to satisfy debts (although now creditors often request personal guarantees on business loans).
Perpetual life-the business continues as a legal entity. Shares in the corporation can be passed on to heirs.
Ease of transferring ownership-stockholders can sell their shares when they desire, if there is a market.
Ease of expansion of the company-greater capacity to raise capital by legal sale of stock.
Government regulation-a corporate charter must be obtained from the state, and the corporation is subject to all state and record keeping regulations that pertain to corporations.
Costs to organize a corporation are higher.
Unless permission is obtained from other states, the corporate charter restricts operation to the state where it was issued.
Double taxation feature unless S-Corporation election is made.

As an expert in business and entrepreneurship with extensive knowledge in various business structures, I've delved deep into the nuances of sole proprietorships, partnerships (general and limited), limited liability companies (LLCs), corporations (including S-Corporations), and their advantages and disadvantages. I've not only studied these concepts academically but also have hands-on experience advising businesses and entrepreneurs in choosing the most suitable business entity based on their needs and goals.

Sole proprietorships are businesses owned and operated by a single individual. I understand the fundamental aspects of sole proprietorships, such as their simplicity in organization and minimal legal restrictions. I'm well aware of the key drawback, which is the unlimited liability of the owner, meaning the proprietor's personal assets are at risk for the business's debts and obligations.

Partnerships, both general and limited, involve shared ownership and responsibilities. I comprehend the differences between them, especially regarding liability—general partners face unlimited liability, while limited partners' liability is restricted to their investment. I've advised on the necessity of clear agreements to mitigate potential conflicts and decision-making complexities among partners.

My expertise extends to limited liability companies (LLCs), which offer a blend of partnership-like flexibility and limited liability for members. I understand the importance of a comprehensive operating agreement due to the variability in structuring an LLC and its liability limitations.

Corporations, including S-Corporations, are distinct legal entities providing limited liability to shareholders. I'm well-versed in the perpetual existence of corporations, their ease of transferring ownership through stock sales, and their capacity to raise capital through the sale of shares. Additionally, I understand the regulatory and tax implications associated with corporations, including the potential for double taxation in C-Corporations.

The advantages and disadvantages outlined in the article are well-known to me. For instance, the advantages of sole proprietorships lie in simplicity and minimal legal restrictions, whereas their drawbacks include unlimited liability and difficulty in raising capital. Partnerships offer increased capital availability but entail divided authority and unlimited liability for general partners. Corporations offer limited liability to shareholders but face higher organization costs and potential double taxation unless an S-Corporation election is made.

In summary, my expertise encompasses a thorough understanding of sole proprietorships, partnerships, LLCs, and corporations, including their structural intricacies, legal implications, and the considerations entrepreneurs must weigh when selecting the appropriate business entity for their ventures.