Choosing the Right Business Entity Type

Choosing the Right Business Entity Type

There are four common ways to own and run a business in the United States:

1. Individually, known as a sole proprietorship
2. With one or more people, in a partnership, which may be either a "general partnership" or a "limited partnership"
3. By filing with a state government to form a corporation, which may be either a "C" corporation or an "S" corporation
4. By filing with a state government to form a limited liability company (LLC)

Each form of business has distinct characteristics that you may find advantageous or disadvantageous, depending on your particular needs. The main distinguishing characteristics of the forms of business are:

• how quick and inexpensive it is to create and run a particular form of business,
• whether the owners or managers of the business can be liable for the business's debts,
• how each form of business is taxed, and
• how easy it is to transfer ownership in the business.

Sole proprietorships and partnerships have advantageous tax consequences, but they can expose the sole proprietor and general partners to liability. Corporations, on the other hand, shield the shareholders and managers from liability, but have higher taxes. Limited liability companies (LLC) have some characteristics of a partnership and some characteristics of a corporation. LLCs have become popular in recent years because they offer the advantageous tax treatment of proprietorships and partnerships but, like corporations, they shield members from liability.