Looking for information on business entities? Well, you are at the right place.
Business entities come into picture once you start thinking about global expansion.
The type of business entity you want to choose plays a crucial role in determining the structure of your business operations.
Lets dive straight in.
What are business entities?
Business entities are organizations created by one or more people to participate in a business, trade, or other activities. Different countries follow different entity types. The most commonly observed types of business entities are:
- Sole Proprietorship
- Partnership (General and Limited)
- Limited Liability Company
- S Corporation
- C Corporation
Depending on the choice of your business location, these may vary, depending on the laws prevailing. Based on the location of your business and the laws governing, you are free to choose the desired type of business entity.
Why are the types of business entities important to you?
Before you set up a business entity, you should understand what type of entity suits the business you are planning. Each type of business entity has its regulations to follow.
The type of business entity you set up is based on:
- Taxes you pay
- Legal status of business
- Ownership possibilities
- Viability to expand and more
These are critical elements you need to consider while starting a business.
With so many options available, it is quite a task to recognize which business entity type fits your needs. You must have extensive knowledge of the different types and what they offer and do not.
What are the different types of business entities?
Different types of business entities have different rules and regulations. For instance, partnership entities are run by two or more individuals who share assets, liabilities, responsibilities, and risks. This is not the case with sole proprietorship, which has only one owner.
It is time to understand the ground rules applicable to the various types.
The sole proprietorship entity type is the simplest.
You run the business yourself. There is only a single owner and decision maker. You cannot have any investors and don’t have to file articles of incorporation.
If you choose sole proprietorship as the business entity type, the IRS treats you and the business as one and the same.
A sole proprietorship is not required to register with the state. But you might need licenses and permits depending on the industry of operations. Also, you need to track profit and file Schedule C along with your Form 1040, which is for personal income tax returns.
Examples of sole proprietorship businesses can be freelancers, consultants, and other professional service providers who work as sole proprietors.
The main difference between a sole proprietorship and a partnership is that there is only one owner in a sole proprietorship. In contrast, in a partnership, more than one partner is involved, and they enter into a partnership agreement.
A partnership business can be:
- General partnership
- Limited Partnership
General partnerships – In this type of partnership business, there are at least two partners, investing capital and sharing risks. Plus, they share their profits and losses.
Similar to a sole proprietorship, in general partnership type business entities, you need not have to register with the state.
Limited partnerships – Unlike general partnership, limited partnerships need registration with the state. In limited partnership, at least one partner is not involved in the management but only invests. That investor is a silent partner.
Limited Liability Company (LLC)
LLC can be a single-member LLC or a multi-member LLC. The members are the owners of the company, just like partners in the previous instance.
LLCs have features of both sole proprietorship and partnership. Unlike a sole proprietorship, LLCs have limited liability. But there is less paperwork involved in registering the business. So, in that case, LLCs are more like sole proprietorships.
Income benefits in LLCs are more like partnership businesses. They have operational flexibility. But they also have limited liability exposure. However, this type of business entity seems more like a limited partnership. There are statutory and legal differences to it.
Among the legal entity types, a corporation is an independent entity that operates under state law and exists as a separate entity from the company owners or shareholders.
C Corporation is a legal type of business entity that operates under the state law, and whose owners and shareholders are taxed separately from the entity. The best examples of C corporations are Microsoft and Walmart.
C-corps are considered to provide best protection from personal liabilities. However, it is also the most elaborate of business structures and may consist of shareholders, a board of directors, and officials, who decide the company’s course of action.
A corporation has quite a complex structure that requires more documentation, operational processes, record-keeping, tax compliance, and reporting.
If you choose the corporation type of entity business, you must file the Articles of Incorporation with the state. To file taxes, C Corporation needs to file taxes on the profit and loss using Form 1120.
An S corporation is a type of closed corporation. It means the corporation is held by a finite number of shareholders and does not have public trading.
The S Corporation is constituted by converting the C Corporation created by Articles of Incorporation through Form 2553.
This type of business entity also provides limited liability, like C Corporation. But S Corporations are pass-through entities for tax purposes. That means, S Corporation’s profits and losses pass through the personal tax returns of the shareholders.
There are many regulations around the S corporation, from a limited number of shareholders to the fact that a C Corporation cannot be a shareholder. The taxes are filed through Form 1120S. It has to be noted that S Corporation does not have corporate-level taxes.
Also note, for S Corporation, the shareholders have to be US citizens/residents.
A Comparison Between Different Types Of Legal Entities
Now that you are well aware of the common types of business entities, have a look at the comparison between these business entity types.
Looking to simplify the process? Well, you got solution!
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Rather than investing strenuous effort, time, and costs in creating an entity of your own, you can simply use the Multiplier Employer of Record to kick-start your enterprise in any foreign land.
Well, coming to costs, we have even better news – quite affordable. Get to know how Multiplier makes a difference as compared to setting up a business entity in a country.
Are you thinking of a particular country for your global expansion?
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