Business Entity Type To Choose

When starting a company, there are several business entity types to choose from. Selecting the appropriate business entity type would depend on the features or aspects you want your company to avail on. The type of business entity of your company is not permanent. You can change from one business entity type to another, granting that your company qualifies for the said entity type.

Choosing the appropriate form of business entity would probably be the most difficult step in starting a company. The main factor that a business owner should think about is protection from liability. Other considerations that you need to keep in mind are transferability of ownership rights, capital needs of the business, and tax status. Note that the type of business entity that you choose will govern the legal requirements of your company. You can use the following descriptions of the major business entity types as your reference.

• Sole Proprietorship
  
  Also known as sole trader, this business entity type has no separate distinction from the personal assets of the owner. In this type, the company or business is owned and run by a single person. Thus, all the profits and liabilities are the sole responsibility of the owner. If a lawsuit is filed against the company, there is a possibility that all the assets of the owner, including his personal assets, might be stripped away from him. On the bright side, in a sole proprietorship, the owner will only file a personal income tax, which certainly makes accounting easier.
  
  For an entrepreneur who is just starting, they may opt for a sole proprietorship. In setting up this type of business entity, no additional work is performed in initiating the business. However, a sole proprietor usually finds it difficult to raise a capital since it does not have shares to sell. Moreover, there can be great constraint and management pressure when the business size is growing at an accelerated rate.
  

• Partnership
  
  This type of business entity is considered as the oldest and the simplest. Basically, individuals who engage in the same business and share profits are considered partners. It is formed by 2 or more persons, and the owners are personally accountable for any legal actions and debts incurred by their company. The partners share equally all the profits and losses in their investment. If they have encountered bad debts, all the assets of the owners are subject to insolvency to recompense the creditor. With regards to tax, the owners of a partnership are taxed only once.
  
  The partners have equal rights to participate in the administration and handling of the business.
  
  The downside of this is that when a partner dies or decides to pull out his partnership share, then the partnership, as a legalized entity, will dissolve. In this case, the share of the withdrawing party can be purchased by the remaining partners of the entity.
  

• Corporation
  
  A corporation is basically simpler to manage and has lesser liabilities. However, not all businesses can be a corporation. In a corporation, the owner of the company will just sell shares in order to get additional funds or increase its capital. The shareholders hold annual meeting and the have to elect their board of directors.
  
  The main benefit of having a corporation is that it has limited liability wherein the losses or bad debts acquired will be the responsibility of the corporation. Their personal assets will not be dragged into the picture. However, the company will have double taxation unless the company is an S corporation.
  
  Corporation, as a business entity type, may be complex in terms of setting-up and administration. It composes of a body, which governs the management of the entity and has influence on the operation of the corporate business.
  

In order to make a wise decision, it is advisable that you seek legal counsel or a professional accountant. They can surely help narrow down your decisions and be able to choose the appropriate business entity type.

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