A Survey of Business Entities
If you own a business you'll want to form it as some sort of legal entity, but which is the right one to choose? This article presents a survey of the various business entities available and compares the benefits and drawbacks of each.
Sole Proprietorship
A sole proprietorship is a business owned and operated by an individual, and can only have one owner. Starting a sole proprietorship is quick, fairly uncomplicated and relatively inexpensive. You do not need file documents with the state to form your business, as you do with corporations and Limited Liability Companies. If you plan to conduct businesses under a trade name, rather than your individual name (i.e. Field’s Landscaping rather than John Field) you will need to file a DBA (Doing Business As) with a local or state office. There may be additional licenses required by the state and city where you will operate your business (sales tax licenses, liquor licenses, etc). These requirements vary by state. Another thing to consider is that legally, with a sole proprietorship, the owner and the business are the same. The owner is personally responsible for the debts of the company.
Some advantages of a sole proprietorship include:
- Relatively little time and expense required for creation.
- Relatively few required formalities and regulatory requirements.
- Some states do not impose a fee for the mere privilege of existing.
- No separate income tax filing for the company – income and losses are reported on the owner’s tax return.
The primary disadvantage of a sole proprietorship is:
- The owner is personally responsible for the debts of the company, meaning the owner’s personal assets may be used to satisfy business debts.
General Partnership
As with sole proprietorships, general partnerships are fairly easy to establish. Partnerships can have 2 or more owners of the business. Partnerships also do not have to file documents with the state in order to form, as do corporations and Limited Liability Companies, although they may need state and/or local licenses to operate.
Partnerships should have detailed partner agreements in place at the time of formation. Partner agreements should clearly address the rights and responsibilities of each partner – such as the amount of capital each partner will contribute, what will happen if more capital is needed, how profits and losses will be distributed, which partners are responsible for particular management tasks, what happens if a partner wants out of the partnership, what happens if a partner dies, etc. Not having such an agreement could place your investments at risk and provide for a lot of extra time and expense, if the business encounters problems.
Some advantages of general partnerships include:
- Relatively little time and expense required for creation.
- Relatively few required formalities and regulatory requirements.
- Some states do not impose a fee for the mere privilege of existing.
- No separate income tax filing for the company – income and losses are reported on the owners’ tax returns.
- Flexibility in establishing the responsibilities (capital, management, etc.) of the partners.
Some disadvantages of general partnerships include:
- Partners are personally liable for the debts of the partnership.
- Partners are responsible for the business-related actions of all other partners.
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