Are you starting a small business? This new adventure into entrepreneurship and business ownership is an exciting one that promises many opportunities for both you and your loved ones. However, knowing what type of business entity to open can be a challenge, especially if you’re not particularly experienced in corporate law. Luckily, The Bobb Law Firm PLLC has put together a great guide on the differences between each type of entity and helping you discover which one will work best for you.
An LLC is a limited liability corporation, a separate business entity owned by a single investor or multiple investors that are known as their members. Many business lawyers can tell you that an LLC would be great for a business owned by several individuals together who want to avoid being held liable for the debts of the business should it eventually struggle. However, you can also own an LLC as a single investor and reap the benefits of tax protection as an individual. An LLC comes with both liability protections and tax advantages, so you pay less overall tax on any income earned from an LLC and are protected from debt or liability for any debts assumed under the name of the LLC.
A sole proprietorship is best suited for individuals owning their own small business as the singular employee and manager. A sole proprietorship is completely free to set up, but does not come with the liability protections or tax advantages of an LLC. If you assume debt in the name of your business set up as a sole proprietorship and the business fails, creditors can go after your personal assets in an attempt to claim the money owed to them. As a sole proprietor, you have less legal hurdles to jump through in establishing your business (making this great for a side hustle or other small part-time work) but are less protected in the long-term (meaning corporate entities would not do well as a sole proprietor).
A partnership is essentially a combination between an LLC and a sole proprietor. Business lawyers can assist you with partnerships because they’re common among smaller businesses started between two or more people as side hustles or part-time professionals. A partnership sees every partner share ownership, profits, and liabilities for business debts; meaning that every expense and profit earned by the partnership is shared equally between its members. The owners face high liability risks here, but have less paperwork, legal hurdles, and tax obligations overall.
A corporation is what we see in many larger business entities or international chains. A corporation is more or less a business owned by many different people, known as shareholders, and managed by an elected board of directors or financial officials. Depending on the categorization of corporations (either for or non-profit), all profits are either reinvested or divided among shareholders as dividends paid out quarterly. All expenses and debts are paid out of proceeds of the corporation, and shareholders are not individually liable for business debts.
Picking the right type of entity can be confusing, so it’s best to trust the advice and guidance of experienced business lawyers at The Bobb Law Firm PLLC. With the firm’s experience, we can analyze and review your business plan before helping you decide on the business entity structure that will best suit your needs.