Which Type of Business Entity is Right for My Company?

There are many different types of business entity structures that you can utilize as a business owner, but there can be uncertainty regarding which business entity is the right one for you. Choosing the right type of business entity is an important part of  ensuring that you will be able to achieve your business goals.

Some of the more common types of business structures include a sole proprietorship, a corporation, a limited liability company, a general partnership,  limited partnership, a limited liability partnership, and a nonprofit. In order to evaluate which business entity is right for you, it is advisable to meet with an attorney during the startup phase of your business. If you have an existing business, you may want to speak with an attorney to make sure that things are set up correctly.

In a sole proprietorship, there is usually only one owner of the company or a married couple owns the company. Although this type of business structure is relatively easy to form and operate, there are some major disadvantages because the owner or owners will be personally liable for all debts and liabilities incurred by the business.

The next type of potential business structure is a limited liability company. This is a very common type of business when there are co-owners, but there are no outside investors. An LLC can be utilized for almost any lawful for-profit business activity, with the exception of certain industries that are heavily regulated by federal law. An LLC has distinct advantages over a sole proprietorship because an LLC can potentially shield your personal assets from liabilities incurred by the company if you maintain the proper business records and do not comingle any of your personal assets with the assets of the business itself.

Other types of business entities include a general partnership and a limited partnership. You can also form a limited liability partnership under certain circumstances. A general partnership has usually two or more people that run the business together and share in the profits and losses of the company equally. In most cases, the partners will sign a written partnership agreement outlining their respective rights and responsibilities. However, this type of business structure does not shield the partners from being personally liable for obligations of the business.

A limited partnership is similar to a general partnership, but the potential losses by each partner are limited to the amount that was invested in the business by that partner. Another way to set up a partnership would be to form a limited liability partnership. An LLP is somewhat similar to an LLC because the LLP can shield the owners from personal liability if all of the business records are properly maintained and other formalities are complied with.

Alternatively, a business owner could decide that forming a corporation is the best route to take. Corporations are more complex to set up and operate than the other types of businesses. However, forming a corporation may provide distinct advantages depending on what your goals are and if you will be seeking investments from individuals that will not be involved in the management of the company. In fact, many investors will refuse to invest in a business entity that is not set up as some type of corporation. In order to figure out which type of corporate structure would be right for you, consult with an attorney who will be able to walk you through the process of determining which type of corporation makes the most sense based on your unique needs and long-term goals.

You could also consider forming a nonprofit corporation, which is a legal entity that is typically created for some type of public interest purpose.  The statement of purpose for your nonprofit will need to be in compliance with the applicable IRS regulations if you are going to be successful in applying for tax-exempt status. The specific type of nonprofit you create will depend largely upon whether you will receive most of your financial support from the general public or a few specific donors.

Figuring out which business structure is right for you may seem like a daunting task if you are unfamiliar with all of the different types of business entities that can be created. An attorney with business law experience will be able to review the pros and cons of each type of entity with you and can help you set up the business structure that will allow your company to thrive.

This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.