Business Entry

Types of business entity

business formationYour choice of business entity is one of the most important decisions to make when starting your new business. This decision affects the amount time it takes to have your business incorporated, how much your company pays in taxes. The liability you face in the course of doing business formation and how you can raise money for the business formation. 

One should consider these factors when choosing the type or any business formation:

  1. How liabilities from the company affects your personal assets.
  2. Taxation.
  3. Attracting the right investors.
  4. Ownership.
  5. The cost of operations. 

There are many types of business entities one can choose from, they have their advantages and disadvantages. It’s important that one weighs the advantages against the disadvantages as they apply to the business of interest. 

Let’s take a look at the different types of business entities one can choose from.                       

Sole Proprietorship

  • This is the simplest entity, usually, it’s about one individual who owns and runs the business. This business entity can be operated under the owner’s name or a fictitious name. Let’s take a look at the major attributes of sole proprietorship: 
  • Taxation 

Because the sole proprietorship is about only one individual, the taxation is very simple. The owner and the business are all the same, therefore both the income and expenses of the business are recorded on the owner’s personal tax return. 

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Partnership

  • The partnership is a type of business entity where two or more individuals agree to share the profits and debts of a business enterprise. 
  • Under partnership entity, all the partners are responsible for the liability and the debts incurred from the business operations. A lot of different arrangements can be in play: partners might agree to share profits and debts equally or by percentage. 
  • Partnership enjoys favorable taxation as the corporation does not pay income tax rather this taxation is passed over to the owner’s personal tax returns.
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C Corporation

  • C-corporation is a type of business entity owned by shareholders who elect a board of directors to run the business. Owners of C-corporation are not liable for the debts and losses of the company and can not be sued personally for the company’s misfortune. 

 

 

 

  • Many business owners seem to shy away from this entity because of double taxation but it has the advantage of the lower corporate tax return on profits reinvested on the
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S Corporation

  • S-Corporation is a type of corporation that gives its owners limited liability protection. It’s more attractive to business owners than the standard corporation because of its tax benefits. Shareholders are only liable to pay for tax on their personal income. 
  • S-Corporation is expected to have at least 75 shareholders before it can be considered eligible to apply for subchapter S. 
  • One major disadvantage of S-corporation is that only the US citizens and residents can own own it.
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Non-Profit

  • The non-profit or non-business entity is an organization which the main purpose of formation is not to make a profit. These organizations are mostly for social causes or charitable. We can say that their purpose is for public benefits. 
  • Because of this good purpose, non-profit organizations are exempted from taxation, and their directors and employees are protected against the company’s liability. 
  • Regardless of its name, non-profit organizations may generate profit. This
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