Whether it is starting a new venture or expanding an existing business, an entity is one of the first things that come to your mind. Be it a small home office or a large corporation, every business functions out of an entity. In the first quarter of 2022, 347.000 new businesses started in the United States. All of these business owners must have gone through the phase of understanding what an entity is. So let us help you smoothly drive through this in the following post.
What is a Business Entity?
In very simple terms, a business entity is an establishment out of which one or more individuals conduct business and engage in trade. Many people believe that a business entity is a physical location from which a business operates; however, that is not the case.
A business entity refers to the overall structure of your company, and these structures classify the rules and regulations under which you can do business. Usually, these business entities maintain a separate legal existence for tax purposes. They can be created at a local or state level.
This classification further clarifies the kinds of liabilities your business may carry, the taxation on your income, and the number of employees you can hire. To have a definitive distinction between different types of businesses, entities are divided into four types.
Sole Proprietorships:
These are businesses that are owned and handled by a single individual. If you start a business without registering, you automatically become a sole proprietor.
Partnerships:
Partnerships are owned by two or more people. Partnerships are further divided into general and limited partnerships. In a general partnership, both owners contribute equally and are equally responsible for the profits and losses. Limited partnerships have two kinds of partners, general and silent. The silent partners have very limited say in the procedures of the business, and they also have limited liability in the business.
Corporations:
Corporations are independent, legal entities that clearly distinguish between the business assets and the owner’s personal assets. This type of business can have multiple owners, including a board of directors or public shareholders.
Limited Liability Companies (LLCs):
LLCs are a perfect blend of all the benefits of each kind of entity mentioned above. You have very limited liability as an owner, and you can choose how your business will be taxed.
In the different types of entities, some businesses are directly linked to the owners (es: sole proprietorships), whereas some businesses are registered separately.
The IRS refers to the former as ‘Disregarded Entities.’ This is because the tax imposed on these businesses is also the owners’ personal income tax. A Schedule C form can make the distinction between business and personal expenses on a personal income tax file.
Now that you are clear on business entities and their types, you must understand when a new business entity is required.
The right time to set up a new business entity
The timing for a new business entity depends on the goals you have with your new or existing business. Depending on the requirements and objectives, the right time to start a new entity is when you are
Starting a new business:
Every new business must be classified as an entity. It can either be a sole proprietorship, partnership, or corporation.
Expanding into new markets:
Say your existing business is growing rapidly, and you would like to expand into a new market. This is where setting up a new entity could come into play. The new market could be a different state in your country or even a foreign country.
Hiring international employees:
To legally hire international employees, you must have an entity in the country you wish to hire from. For example, your business is set up in the United States, and you want to hire employees from Indonesia. For this, you will have to set up a legal business entity in Indonesia, register your business there, and then hire employees.
Is this the best time for you to set up your business entity? If yes, then you must be acquainted with some of the things you should have in mind before setting up an entity.
Things to consider before setting up an entity
Setting up a business entity is a major step that should be considered only after you have put enough thought into it. You must carefully evaluate the following points before setting up a business entity.
Business goals and objectives:
Does your business need a new entity? If yes, then you should be affirmative on the kinds of results you are expecting out of a new entity. Evaluate the risk, costs, and expected returns and only then go ahead.
Taxation:
Tax laws vary from state to state and from country to country. You must understand the tax laws of your potential location very carefully and choose the type of entity that would be the most beneficial. LLCs usually give owners maximum freedom when it comes to taxes. Sole proprietors also have a lot of freedom; however, the business taxes are directly linked to their personal tax, and that can cause issues with classification in the long run.
Classify your transactions:
According to the Business Entity concept for Accounting, the business transactions and the owner’s personal transactions must be separate. This helps you have a definite idea of how much money your business spends, and it can also be filed accurately. This comes specifically in use when your business has multiple entities.
Cost of setting up:
Setting up a business entity is costly, especially if you’re looking to expand internationally. A new entity comes with an upfront cost worth thousands of dollars and also brings along recurring maintenance costs.
Is there an alternative?:
Before setting up a business entity, you must ask yourself this question. For example, if you are setting up an entity just to hire employees in that region, you can partner with an Employer of Record instead. It will help you save hundreds of thousands of dollars in the long run, and your requirements will be fulfilled much faster and more efficiently.
If a new business entity is absolutely necessary, even after evaluating the above points, go ahead and set it up. Before you do so, let us give you an outline of the steps you must follow to set up a new entity.
Steps to establishing a business entity
Once you make the decision to start a business entity, you are halfway across the bridge. You must follow a few simple steps to get to the rest.
Name your Entity
Your business name is your brand that people will remember. It is going to be known by that name across the globe. These points add more importance when it comes to naming your business. We recommend you check the availability. Trademarks let you block the name from further use.
Choose a Legal Entity Structure
The legal entity structure you choose determines how your business will be taxed and what liabilities you personally might hold.
Select a Location
It only seems logical to choose locations closer to your target audience. Thus, choose suitable and convenient locations that serve you and your customers well.
File Necessary Paperwork
Registration differs for different business entity types. Some require you to register with the state authority and agency. However, getting local permissions would be enough to set up sole proprietorships and general partnerships.
Set up Financing and Taxes
Funding is essential to grow and promote your business and brand. Set up proper financing and tax regulations for a smooth setup.
Hire Employees
Once your brand is set up, hiring qualified people to work to fulfill its purpose is the next thing. Hiring, though tedious, can get the right employees to work for you.
Hiring international employees? Choose Multiplier, not an entity.
Business entities are essential to start a business. You can either learn to manage them well or share the responsibility with us.
At Multiplier, a SaaS-based EOR solution, we let you hire without you having to open legal entities. We do the groundwork for you to have a hassle-free business entity establishment and hiring.
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Book a demo to know more.
Frequently asked questions
What is a business entity with one owner called?
A business entity with a single owner is known as a sole proprietorship.
Is a company an entity?
Yes, a company can be classified as a type of business entity.
What type of entity should my business be?
The type of entity your business should be set up as depends on a number of factors. These factors include the number of people involved, whether it is a new business or a new entity for an existing business, your goals, the number of employees (if any), etc.
What is the purpose of defining a business entity?
Your business must be classified in order to determine the liabilities the owner/s hold. Classification will also help you understand the kinds of tax laws your business will have to follow.
