Types of Business Entities
The entrepreneurial spirit lives in some people. From humble beginnings running a lemonade stand or lawn mowing service, the feeling of receiving payment for hard work sparks a fire that can grow into big things later in life. If you have taken the leap to build your own business, you need to decide what type of entity you want to create. Do you want to be your own boss? Do you want to do it all? Are you comfortable letting others make business decisions on behalf of your company? These are all questions that will come into play as you navigate the different types of business entities available.
Types of For-Profit Business Entities
- Sole proprietorship
- S Corporation
- Limited partnership
- Limited liability companies (LLC)
A sole proprietorship has an emphasis on the word sole. As the business owner, you will make all decisions regarding your business. This is an easy entity to create, however there are some potential pitfalls. Regarding taxes, you will be taxed on all business profits and you may deduct business losses from your own personal income taxes. You will also be personally liable for any lawsuits filed against your company.
A corporation is an independent company owned by shareholders. This type of entity is more complicated to create and requires that taxes be filed for the corporation. Business owners have limited personal liability for lawsuits filed against the company. Regular meetings and record-keeping are mandatory.
An S corporation can have up to 75 shareholders. In an S corporation, owners and shareholders share the net profits and losses and must also report those earnings on their personal taxes. Their share of business losses can be reported on their personal taxes to offset other income. Regular meetings and record-keeping are mandatory.
If you have a partner that is helping create your new business, you may want to consider a partnership. This type of entity is not limited to two people – there can be several partners in the mix. These people will jointly own and run the business together. All partners will be liable for business debts from all partners but there is no double taxation. Regarding taxes, all partners will be taxed on their share of business profits and partners may deduct their share of business losses from their own personal income taxes. All partners will be personally liable for any lawsuits filed against the company.
This type of entity allows for investors to enter the partnership on a limited basis. They will not have control of the business, but they can reap rewards if the business succeeds. Limited partners will only be liable for their share of investment into the company and they will only be partially personally liable for debts or lawsuits filed against the company.
Limited Liability Companies (LLC)
An LLC is a flexible legal entity that combines features of both corporations and partnerships. Some owners can be set up to receive larger portions of business profits than others, but this also runs the risk of greater losses for the owner. Owners are not personally liable for debts or lawsuits filed against the company.
This is just a basic overview of the types of entities that your business can consider. If this information seems confusing or if you would like to delve deeper into each type of entity, the Denver business planning lawyers at The Brown Law Firm, LLC can help you understand the differences and help you set up the option that makes the most sense for your particular business model, potential pool of partners, budget, timeframe and more.
If you’ve worked hard to start a business in Denver, you need to make sure you protect your personal assets, set the right liability limitations and save money on taxes. Our experienced team can help you prepare the proper paperwork to get your business established. Contact us today at (303) 339-3750 or send us a message online to bring your unique situation to the table and start discussing your best options.