One of the most important considerations you have to make while starting a business operation is choosing the right Legal Entity. A legal entity has the capacity to enter into agreements and contracts,own assets, sell and buy property in its name. For better efficiency, ensuring accountability, better management of taxes and catering to personal liabilities and license requirements the decision of choosing the right legal entity becomes really important. To better understand entities lets have an insight into the types of entities:
- Sole Proprietorship: The simplest of all kinds of a legal entity set-up is the sole proprietorship. It is easy to form and it can be formed simply by creating a DBA (doing business as) name.The business license is easy to obtain after making sure that no one else is doing the business with the same name.There is no formal filing required for a sole proprietorship, the same can be fulfilled by paying your personal taxes.The main drawbacks of this are that there is a high amount of personal liability.If the business is sued, the business owner is personally liable for the same.As there is no equity to sell to an investor, raising capital for such set-ups can be difficult.
- Partnership: A partnership is similar to a sole proprietorship except that the profits have to be shared here amongst the partners. There can be two types of partnerships, in a general partnership, the profits and liabilities are shared among the partners equally whereas in a limited partnership, the sharing of profits and liabilities is as per the owner’s percentage in the set-up. The partnerships are easy to form and the liabilities can be more easily shared within the partners. The drawbacks are that the partners are jointly and individually liable to pay the debts for the actions of one other and the personal assets can also be seized for the payment of debts.
- Corporation: Unlike a sole proprietorship, a corporation is a legal entity that is owned by the shareholders instead of a business owner. It is the corporation that is liable for the debts and liabilities of the business. Mostly the corporations are set up for larger business purposes and they have a detailed tax payment and norms of establishment. The advantage with a corporation is that there is limited liability. The shareholders are not personally liable for the actions of the corporation. Corporations file their own personal taxes separate from their shareholders. Generating taxes is easier in a corporation by selling shares of stocks to investors.The drawbacks of a corporation are that there are a lot of other administrative requirements including the Federal, State and local government regulations. Corporations also have to pay double taxes, once when they report their profits and the other when the dividends are paid to the shareholders.
- Limited Liability Company: The members of a LLP can be individuals, partnerships, corporations or any other LLP. The profits, losses and taxes are payable in a way that is similar to a partnership.The advantages of a limited liability set up are that the members are not personally liable for actions of the corporation. LLP does not pays “corporate tax’’ as it is not recognised as a business entity. There is a better opportunity for finding loans by a LLP .The operational functions are also few with it. The net income of an LLP is subject to taxation and the members have to pay individual taxes as they are considered self-employed.
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