What is a business entity? A business entity is simply an organizational structure within which your business functions. Try to think of it as a vehicle for your business model. Some vehicles are more appropriate than others to transport certain types of cargo. For example, if you are the sole owner of a small greeting card business that you run out of your home, a basic vehicle like a sole proprietorship is probably the best entity for your business. On the other hand, if you are part of an eight-member partnership, functioning across three different states, and working to deliver professional services, you may need a more robust vehicle that allows for these complexities, such as a Limited Liability Company (LLC) or a Limited Partnership (LP). If the cargo is too heavy and your vehicle too small, this will likely cause friction within your business. Conversely, if your cargo is too light and your vehicle too robust, this could create waste and unnecessary administrative work for you.
What types of business entities can I choose from? The most common business entity is a sole proprietorship. This is also the default entity for anybody who starts a business. A business begins to exist when a person provides services or products for profit. Other types of business entities include:
Can I change business entities down the road? Yes, and it will likely be is likely a smart move. Your vehicle should grow with your cargo. You may find that the entity you’ve been using for years is no longer suitable for your growing business, requiring you to transition to a different entity that serves your new, more complex business needs a little better. For example, five years ago you may have registered a small taco stand as a sole prop making $40,000 per year. But now, you have a partner, employees, and you’re bringing in $150,000 per year. With this business growth, you also have new facts to consider and new considerations to make.
How do I select the best entity for my business? Of the many factors to consider in selecting an entity, focus on three: (1) liability, (2) flexibility, and (3) tax implications.
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*This material is intended for general information purposes only and does not constitute legal advice. Each case requires unique legal analysis of law and facts. For legal issues that arise, the reader should consult legal counsel.