Friday, March 6, 2009

Business Entities - Do You Know Your Type?

In an age where individuality is celebrated and cultivated, it is important to acknowledge the fact that there is an element of this individuality to business. Not all businesses are created equal, nor can they all be incorporated under one type of category. There are a number of categories that a business can fall into. Educating yourself on these types and their functions can only help improve your business intelligence and ultimately, benefit your business. Be savvy and you will be successful!

The following are types of business entities that you will likely encounter in your entrepreneurial experiences:

Sole Proprietorship

This is an unincorporated business that is owned by a single individual, thereby giving the owner control over all management decisions. In terms of simplicity this is the most basic form of business organization. All assets of the business whether used in the business or personally owned are at risk. The liabilities lie solely with the owner, making it an unlimited personal liability for the owner. In terms of capital, it is usually obtained by borrowing from the owner's personal assets. The proprietor will also pay taxes at their individual rate on the net income of the business as all income and expenses will be on the owner's personal tax return.


A partnership involves an affiliation between two or more people who reach an agreement to launch a business together. Each person contributes money, property, labor or skill, and shares in the profits and losses of the business. A partnership must file an annual information return to report the income, deductions, gains, losses etc., from its operations, but it does not pay income tax directly. Any profits or losses are "passed through" to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return. As with a sole proprietorship, the partners have unlimited personal liability for all partnership debt, expect in the case of a limited partner, whose liability is limited to their investment.

"C" Corporations

When forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. It is legally treated as a separate entity so the owners' liability is limited. Unlike the other options previously mentioned, the profits from the corporation are taxed to the corporation when earned, at the corporate tax rate. The shareholders will receive a dividend, which will then be taxed on their personal returns. It is important to note that any losses incurred within the corporation may not be included or factored into the personal tax return of the shareholders.

In addition, this type of corporation will be run by a Board of Directors elected by shareholders, and offers greater insurance of longevity as the corporation will continue despite the death or withdrawal of a stockholder. The overall liability decreases due to the greater share of responsibility, and any loss will be limited to corporate, not personal, assets.

"S" Corporations

The above description of a "C" Corporation involved a double taxation of money, something you might not find so appealing. If a domestic corporation meets certain eligibility requirements, it can avoid this double taxation. While the "C" Corporation is taxed at the corporate rate for profits, the Subchapter "S" Corporation is taxed at the business owners' individual tax rate (based on percentage of ownership).

An "S" Corporation is exempt from all federal income tax excluding the tax on certain capital gains and passive income. On the tax return of an "S" Corporation, the shareholders include their share of the corporation's separately stated items such as income, deduction, loss and their share of non-separately stated income or loss. Looking into the criteria necessary to qualify for this status could prove beneficial for you, your business, and your bank account. Be aware that there is a maximum number of shareholders allowed in this type of corporation.

Limited Liability Companies (LLC)

You might have heard the term "LLC" being thrown around, peppered sporadically into conversation, but do you know what it entails? Basically, an LLC is the new kid on the block for business structures. They share some characteristics with all of the above mentioned business types. For example, like a corporation, their owners have limited personal liability. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation. The owners of the LLC are known as "members", and these members can include individuals, corporations, other LLC's and foreign entities. There is no cap placed on the number of members, nor a minimum, as an LLC can sometimes include a single member. The limits you will encounter include the type of business you can operate, as banks, insurance companies, and nonprofits cannot be LLC's. Again, look into your state's requirements for confirmation and definition of the requirements in your area.

At this point, looking for an attorney and/or a CPA to help you with these choices is a smart move. They can help you choose the right form of business and make sure the proper papers are filed with the appropriate parties.

Wiping your brow yet? The average person may be unaware of all the various types of business structures that exist, but you are no average person. You are choosing an avenue of business that makes this knowledge mandatory. You should go into the study of business as you would have gone into studying for a final in college. Be prepared, take notes, and don't let yourself be overwhelmed. The fact that you are taking steps into researching this material, by reading articles such as this, demonstrates an understanding of what is required to succeed in the business world. Cultivate an attitude that seeks knowledge, storing up the kernels for future needs. Investing the time now in doing the legwork, creating your business plan, and researching will pay off in much more rewarding dividends down the road.

Aaron Dyer is President of Dyer Consulting Group, a firm that works with start-ups and small businesses who want to increase the value of their company. He helps them focus on ways to grow their business through better strategic planning and financial management, which have led to higher revenues and greater profitability for his clients. Aaron brings over 12 years of proven financial, business development, strategic planning, sales and marketing, and management expertise to his clients. His passion for helping companies improve their operations and create value compelled him to found Dyer Consulting Group.

Visit Dyer Consultung Group on the web at

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