Legal Entities For Business: A Compact Guide
When you want to start your own business, one of the major steps you need to take is choosing your legal entity. Your legal structure will determine how you'll pay tax, share company returns, the management structure, capital raising abilities, and others. Therefore, you should carefully select the legal entity that best fits your company and the nature of its operations.
Types Of Business Legal Entities
There are four major types of business structures. However, deciding which one's right for your business can be overwhelming. Fortunately, this post has provided information about each legal entity. Continue reading to learn more.1. Limited Liability Company
A limited liability company (LLC) is the most common business entity among entrepreneurs globally. It's a hybrid structure that combines the characteristics of a partnership and a corporation.Under the LLC legal entity, owners aren't personally liable for the business debts and other liability obligations. At the same time, the business doesn't pay tax in its own name. Instead, owners or members are responsible for paying taxes from the share of their profits.
You also need to know that an LLC has a perpetual existence. Once formed, it becomes a separate entity from its owners. The company doesn't cease to exist even when ownership changes. In other words, a member's withdrawal from the company doesn't mean the business must be dissolved.
When entrepreneurs want to start LLCs, one of the common questions they ask is how long does it take to get an LLC approved. The exact time it takes to complete the process varies from one state to another. And it depends on how you submit your documents. For instance, it can take less time if you submit documents online than when you utilize postal mail. But generally, it can take a few days to get an LLC approved.
2. Sole Proprietorship
A sole proprietorship is another legal entity you can consider when starting your own business. And as the name implies, this is a company owned by one person. Therefore, they take all the business profits.Another benefit of starting a sole proprietorship business is that it requires less paperwork. Other legal entities require you to file many documents with officials. For example, when registering an LLC with the state, you must file articles of organization, operating agreement, employer identification number, and many other documents.
With a sole proprietorship, you don't have to file any document or register with the state. You only need to obtain licenses and permits to start doing business. It, therefore, allows you to start a business without much paperwork.
Although running a business as a sole proprietorship has several benefits, it also has some disadvantages. One major drawback is that it's impossible to separate the owner from the business. Most sole trader businesses bear the names of owners. Therefore, the owner becomes liable for the business liabilities. In other words, a sole proprietorship can't shield your personal assets from the business's debts.
3. Partnership
A partnership is a business enterprise owned by two or more people. It involves individuals coming together to do business to share profits.Members of a partnership are known as partners, and in most cases, they share profits based on the amounts of their capital contribution.
And like an LLC, a partnership business doesn't pay tax in its own name. Integrated, partners pay taxes from their share of profits. Further, a partnership allows owners a greater borrowing capacity. Therefore, you won't have any challenges raising capital to fund business operations and growth.
4. Corporation
The last legal entity to consider when starting a business is a corporation. Once formed, a corporation becomes a legal person in the eyes of the law. Therefore, it does most things, such as hiring employees, signing contracts, suing, and getting sued in its own name. A corporation, therefore, is one of the best legal entities to protect personal assets from business mistakes.Members of a corporation are known as shareholders and get returns in the form of dividends. So, the more shareholders one has, the higher the returns or dividends will be.
Takeaway
Part of starting your own business is choosing the legal entity it'll assume upon registration. The four major forms of legal entities are limited liability companies, sole proprietorships, partnerships, and corporations. You need to look into each one's features to determine which legal entity would work well with your company's needs. Contact an enterprise lawyer, business mentor, and other business experts to help you pick the perfect legal entity that'll best meet your company's specific situation.Do You Need An Attorney?
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Posted - 04/25/2023
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