Home Companies What are the Business Entities and How Do You Use It?

What are the Business Entities and How Do You Use It?

by GBAF mag

What is a business entity? A business entity is a legal entity designed to perform commercial activities for profit. The kind of business entity most frequently formed is in the state level, frequently by filing legal documents with the state agency for the specific jurisdiction. Business entities can also be individually created by a sole proprietorship, partnership or corporation. Most entrepreneurs choose to form a limited liability company (or LLC) to shield themselves from personal liability if their business does not perform as hoped. Limited Liability Company allows business owners to control their personal assets and liabilities through a complex chain of command.

However, business entities must be carefully documented to make sure they meet legal requirements. Forming LLCs can be done quickly and conveniently online using a forms online software package, or through your lawyer. Most business entities are best created during the startup phase, when financial funding is available and little business experience is required. Limited Liability Company (LLC) filings are a little more complicated, but there are plenty of firms that provide assistance with paperwork.

Sole proprietorship is one of the easiest business entities to form. However, the profit requirement is the lowest. Setting up a sole proprietorship requires setting up a separate legal entity, commonly a partnership, a corporation or a sole proprietorship. Filing joint-venture paperwork with other partners in the business is often a good way to get around some of the risk inherent in a partnership.

Corporation is the next easiest form. A corporation needs to be registered as an entity by the U.S. Office of the Secretary of States. Businesses are usually run by a single leader, so it’s easy to establish a company with just one director and shareholders. However, companies have several levels of officers and owners, so it’s necessary to clearly identify who each is, for purposes of IRS audit. There are also indirect owners and joint-venturers who do not technically qualify as owners, but share in the profits of the business.

Franchise is the ultimate in flexible business entity structure. Franchises can be operated under numerous names; the same name can be used for all of them, as long as they are conducted under one corporate shield. A franchisee is generally treated as an employee of the franchisor and therefore is liable for all business expenses. He is also limited in the amount he can earn for his share of the profits. Franchisees are taxed similarly to sole proprietorships, although their liability for income tax is limited to the value of the franchise fee they pay.

The most complex of all business entities is a partnership. A partnership is considered a separate entity from its owners; however, it is still held and operated by its partners. Partnerships are treated as separate entities from the owners that are domiciled in the same place as the partnership. For tax purposes, partnerships are treated like sole proprietorships, with liability for income tax divided between the partners in the event of an event of bankruptcy or death.

Tax law allows business entities to use several different strategies to mask their identity. Business structure can include the use of a corporation, LLC, or S-corp, all of which provide varying degrees of legal protection to the owners. Although LLCs offer many advantages, in some ways they are not as beneficial to individuals or families because of their lack of asset protection.

Although sole proprietorships and general partnerships can be complicated, filing business entities is relatively simple. Filing the paperwork alone should take no longer than a few hours. The IRS offers templates for filling out the paperwork, and most people can complete the forms using minimal effort and competency. With this level of sophistication, what is a business entity and how do you use it can become quite clear.

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