It is so unfortunate that so many people are delving into business every day without understanding what type of business they are venturing into, hence I present to you the 10 Types of business entities.
And I expect you to study them carefully before you know the right one to choose that will be beneficial to your business.
Here are the 10 types of business entities.
- Sole Proprietorship.
- Sub Chapter – S Corporations.
- Professional Corporations.
- General Partnerships.
- Limited Partners.
- Limited Liability Partnerships.
- Limited Liability Companies.
- Nonprofit Corporation
1. Sole Proprietorship.
As the name implies, a sole proprietorship is the kind of business in which a single individual operates.
The business remains part of the individual and so we must not consider it a separate entity.
Its profits and losses amount to the tax returns of the owner, and he also retains the personal liability for all the business debts and lawsuits.
A corporation is a kind of business entity that exists separately from its owners.
This kind of business is formed under the state’s law that it’s operating, after being presented an article of incorporation.
3. Sub Chapter – S Corporations.
This is a kind of corporation that possesses the benefits of limited liability of a corporation but pays tax as a partnership.
The income and losses of this kind of corporation flow through to the individual shareholders.
4. Professional Corporations.
This is a specific type of corporation for professionals, for example, doctors, accountants, lawyers, etc.
These professionals possess the power to form a corporation, but with the exception that each of these professionals remains liable for their own wrongful professional actions.
A partnership is a kind of business entity that allows individuals to share the risk and benefits of a business.
It usually includes general partners, who are liable for partnership debts and actions.
It may also include limited partners who only invest but do not involve in the day-to-day operations of the business.
And they also do not share liability.
6. General Partnerships.
In this type of partnership, all the partners participate in the daily operations of the business, but they all bear personal responsibilities for the debts and liabilities of the partnership.
7. Limited Partners.
When a partnership has both general and limited partners, we often refer to it as a “limited partnership”.
A limited partnership is therefore a business entity that exists distinctly from its partners.
As with a partnership, where all the partners engage in the daily operations of the partnership, as well as have liability for debts and actions of the partners.
However, limited partners neither participate in the daily operations of the partnership nor bear liabilities for the debts or actions of the partnership.
8. Limited Liability Partnerships.
It is the general partners that form this kind of partnership, but all of them are shield from liabilities for the actions of other partners and employees.
A limited liability partnership is similar to a limited liability company, the only difference is that it operates under partnership rules.
9. Limited Liability Companies.
Limited Liability Companies operate like a partnership, but it only has members instead of partners.
The advantage of this type of business is that the liability of its members is limited to their investment.
So, therefore, before you begin your business in 2022 and beyond, make sure you study these 10 types of business entities to know the right one to choose.
10. Nonprofit Corporation
The majority of nonprofits corporation are formed as corporations that apply for tax-exempt status under Section 501(c) of the IRC.
They have the same formation process as other corporations, with articles of incorporation which are filed with the secretary of state, a board of directors, and bylaws for governance.
It is worthy to mention that, nonprofit corporations may be formed solely for the tax-exempt purposes specified in Section 501(c), and as a result are subject to specific regulatory requirements in each state.
Contrary to popular speculations, nonprofit corporations can and are liable to generate profits.
The difference between a nonprofit entity and a for-profit entity is how those profits are invested. Rather than being distributed to shareholders, profits are reinvested in the nonprofit’s operations to serve its charitable mission.