Types of Business Entity Model Used in Business

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Business entities are commercial organizations which have been founded by one or more persons. The business-owners have to file documents with the state agency in order to legally set up a business. It is difficult for an entrepreneur, who has recently started a business, to determine the correct legal structure for the venture. In this scenario, it is prudent to retain the service of a business consultant company. They know how to determine the suitable legal structure for a business since the tax burden of a business and its liability ramifications depends upon it. The five main types of business entity are –

  1. Sole Proprietorship

This the simplest form of business organization according to a business consultant for startups. In this scenario,

  • A business is run by an individual for their own benefit.
  • The liabilities associated with a business are the personal liabilities of a business-owner.
  • A proprietor undertakes the risks of running a business in order to increase their assets.
  • The business terminates with the death of a business-owner who is the sole proprietor.
  1. General or Limited Partnerships –

According to the business mentors,

  • General Partnership

This is an expressed or implied agreement between two or more individuals who are running a business venture for profit. In this scenario, each partner –

Invests their property, money, skills or labor

Shares in the profits and losses incurred by running a business

Has unlimited personal liability for the debts

  • Limited partnerships

The personal liability of each partner for the debts of a business is limited based upon their investment.

  1. Limited Liability Company (LLC)

This is a fusion between a corporation and partnership. The features of LLC may seem similar to the features of ‘limited partnership’. However, there are numerous legal and statutory differences. According to startup consulting firms in India, the members of LLC have operational flexibility, income benefits and limited ‘liability’ exposure similar to the partnership.

  1. C-Corporation

This legal entity operates under the ‘state’ law. The scope of activity of a corporation is restricted by the charter of ‘state’ law.

  • It is essential to file the articles of incorporation with the state in order to build a corporation.
  • Stockholders are protected from liability
  • Employees, who are stockholders, can take advantage of some tax-free benefits.
  • There is double taxation with a corporation through –
    • Taxes on stockholder dividends
    • Taxes on profits.
  1. S-Corporation (Small Business Corporation)

The S-corporations are special type of corporations (closed). There is limitation on the number of members of S-corporation. This type of legal structure is created to provide the small corporations with tax advantage.

It is essential to consult with a business consultant online in order to find out which legal structure is suitable for your business.

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