6 Main Types of Business Entities
A business entity is created when you need to separate your personal and professional assets. They are used to categorize your tax liabilities to the IRS and the respective state(s) that you do business in. The different types of business entities have their own pros and cons, and it’s always best to consult a tax professional when you’re starting a business. The amount of taxes you’ll be obligated to pay is dictated by the type of entity you choose for your business, and while there are more than a dozen types of business entities, there are six main ones for the average small business owner.
A sole proprietorship is an unincorporated business with one owner, or is jointly owned by a married couple. This is the simplest type of entity, and is automatic if you start a business and are the only owner. You won’t need to register the sole proprietorship with your state, but you many need a local business license. Freelancers and consultants are generally sole proprietors.
A general partnership is an unincorporated business that has two or more owners. General partnerships are very similar to sole proprietorships as it’s the default business structure for multiple-owner businesses and you don’t need to register them with the state.
A limited partnership is a registered business that’s composed of active, general partners and passive, limited partners. For limited partnerships, you’re required to register them with the state. There are two different kinds of partners for this entity - ones who own, operate, and assume liability and those who are just investors, often called a “silent partner.”
A C-corporation is an incorporated business that is composed of shareholders, directors, and officers. This type of entity has more regulations and tax laws to comply with, but the owner(s) don’t have personal liability for the company’s debts or liabilities.
An S-corporation is an incorporated business that is taxed as a “pass-through” entity. Being a “pass-through” entity means that similar to a partnership or sole-proprietorship, the profits and losses of the business will pass through the owner’s personal tax returns, but the owners still have no personal liability for the company’s debts or liabilities.
Limited Liability Company (LLC)
A limited liability company is a registered business that has limited liabilities for all members of the business. Limited liabilities companies take what’s best from the other entity types in that they offer limited liability protections like corporations, but because of the ongoing requirements they are more like partnerships and sole proprietorships. For LLCs, you’re able to choose how your LLC gets taxed - either as a pass-through on your taxes or as a corporation.
How you structure your business has a direct impact on your tax responsibilities. Contact Renovo and talk to one of our team members to discuss the types of business entities and see which is best for your business.