Most Common Types of Business Entities In The US
Given the expansive nature of the US economy, there are a variety of business entities that businesses can choose from within their formation period. The most common business entity and type in the US is the Limited Liability Company, or LLC, as of 2022. The other forms of business entities range in popularity, however their use is specific to the needs of any business. Business owners need to research the benefits of each entity, and consider seeking guidance and counsel before committing to one business entity.
Most Common Business Entities
Limited Liability Companies
LLCs are legal business entities that provide members with liability protection. This form of business entity is popular because of both the taxation benefits, and the liability protection. LLCs are pass-through entities, which means that income is passed through individual tax returns. LLCs allow members to be protected from any liability. This liability protection extends to debts, lawsuits, and other claims. This means that if the business is subject to any liability, the individual members will not be personally liable. This protects the personal assets of any business members.
A sole proprietorship is often considered the most straightforward business entity. Sole proprietorships are owned and operated by a single person or member. This means that there is no legal separation between the owner and the business itself. This particular business entity is most prevalent amongst small businesses. Like with LLCs, sole proprietorships utilize pass-through taxation. However, unlike LLCs, business owners are subject to liability within sole proprietorships.
A partnership is similar to a sole proprietorship, in that there is no legal separation between owner and business; however, within partnerships, more than one owner can exist. This is common when more than one person seeks profit for a singular business idea. In these cases, all partners would formulate an agreement regarding profit sharing and business operations. Partnerships are required to report their tax, and must file a yearly return. Each partner or owner needs to report and pay taxes based on their profit portion. Much like sole proprietorships, partnerships have expansive liability. This liability is shared amongst partners.
Whilst corporations are one of the more common business entities, they tend to be more complicated to form. Corporations are separate from their owners. As a result, corporations can enter and agree to legal parameters separately from their owners. However, corporations are generally responsible for tax. The difference between s-corporations and c-corporations is largely due to the way that tax is structured. C-corporations are subject to double taxation, whereas s-corporations are not. Whilst s-corporations need to report their tax, profit is announced on individual tax returns. Like LLCs, members within s-corporations are generally protected from liability.
The Differences between LLCs and S-Corporations
The main difference between an LLC vs s-corporations is that s-corporations allow owners to be taxed as employees. This is different to LLCs, as owners pay self-employment tax. It is important to note that LLCs are a legal business entity, which allows owners to have liability protection. If a business is structured without being a legal entity, they would not have the same liability protection. Non-legal business entities are sole proprietorships and general partnerships. Notably, businesses need to be operating as an LLC before they can elect to an s-corporation status.
A major step before starting a business is deciding which business entity is best suited for the business. Businesses need to devote time to assessing the multiple business entity options available to them. Whilst forming a business as a limited liability company is most common, s-corporations, partnerships, and sole proprietorships are other common and popular business entities.
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