Business Entity Examples (With Explanations)
Having a strong understanding of the internal workings of a business is essential for entrepreneurs. However, this also involves knowing what the different business entities are that you may encounter.
For those who aren’t as knowledgeable as they should be, we have all the information you need to keep in mind. Let’s explore a few business entity examples.
This is one of the most common forms of business. As the name suggests, a sole proprietorship is an unincorporated business that has a single owner.
This individual also pays taxes on the profits they earn from this business.
Due to its simplicity, it is the easiest type of company to form. In fact, many sole proprietorships operate under the legal name of the owner.
For example, let’s assume that a freelance graphic designer wants to start their own business in order to better manage their income and tax obligations. If this person’s name is Sarah Jones, she could create a sole proprietorship called “Sarah Jones” for tax purposes.
As these types of companies expand, they generally end up restructuring into other types of businesses.
As previously mentioned, starting a sole proprietorship is relatively straightforward. However, starting a business of any type involves handling a large number of nuances.
If you aren’t quite sure what you need to be responsible for, you can check out this resource to learn more about the best registered agent service for your company.
In contrast to a sole proprietorship, a corporation is a business that is separate from its owners. However, a corporation is also treated as its own individual.
This means that corporations are able to file lawsuits, be sued by another party, pay taxes, and enter contracts. A more accurate definition of a corporation would be a “legal person.”
A corporation is often formed when a group of shareholders have a common goal. Interestingly, these goals don’t always include generating profit.
However, the vast majority of corporations are formed in order to generate a return for shareholders.
Part of the formation of this business entity involves electing a Board of Directors. These individuals will be responsible for developing a business plan and managing day-to-day operations.
As you can tell, a corporation is much more complicated than a sole proprietorship. There are a large number of different regulations that need to be followed in order for it to function correctly.
Limited Liability Company (LLC)
This type of business structure is established with the intention of preventing business owners from being held liable. To elaborate, let’s assume that a customer, business partner, etc. files a lawsuit against the company.
If the business were not an LLC, then the owners themselves would be vulnerable.
The owners aren’t free of every form of liability, though. For instance, if the government suspects that fraudulent activity has occurred, creditors will pursue the owners of the LLC.
The requirements to form an LLC will depend on the state you live in. Of course, the first responsibility you need to handle is choosing a name.
Afterward, the owners must file articles of organization with their state. This will allow the business entity to become legitimately recognized.
Forming an LLC offers many protections and flexibility that corporations don’t.
Depending on the state in which it is located, there are certain obstacles and LLC may have to face. For instance, the business may have to legally dissolve if one of its members becomes deceased or files for bankruptcy.
When two or more parties come together and formally agreed to operate a business, a partnership is formed. In this context, they also must agree to share the profits.
In some cases, there are individuals known as “silent partners.” These people are generally uninvolved in the day-to-day operations of the company but still benefit from its revenue.
It should come as no surprise that partnerships are highly flexible. The parties involved could be individuals, enterprises, businesses, or even governments.
Partnerships are often the most beneficial when a single person does not have the capital to start a business on their own. Or, a group of people may have a single goal and synergize well when working toward that goal.
So, this is something to consider for those who are looking to get a business up and running as quickly as possible. It also provides a substantial amount of stability compared to a sole proprietorship.
Limited Liability Partnership
There’s also an alternative type of partnership that you could pursue instead of a conventional one. This is known as a limited liability partnership (LLP).
The main benefit of this business structure is that a lawsuit against a single member of the company does not involve other members by default. As such, LLPs are a great option for lawyers, architects, and accountants.
Protecting yourself as a professional is essential under all circumstances. So, don’t neglect the tools that you have at your disposal to avoid trouble in the future.
The Above Business Entity Examples May Seem Complicated
Fortunately, you will likely find that they are much easier to understand than you first anticipated. Keep the above business entity examples in mind when moving forward so that you can avoid common obstacles that entrepreneurs encounter.
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