Business Entities
Business Entities
By: Wilmington Trust

Whether you're just starting a business or already have a healthy, profitable one, should you care how your business is formed? If you haven't given it much thought, realize that your choice of a business entity could affect:

Choosing the type of entity that's right for your business is a difficult decision. There are four basic ways to own and run a business:

Sole proprietorship,
Corporation, and
Limited liability company.

Each has its own unique characteristics. Therefore, depending on your situation, you will have to consider how important each factor is to you. For instance, how critical is it for you to:

Litigation can be a major threat to business owners. Who is responsible if your business fails or has losses? Every day, you probably come into contact with groups that are potential threats to sue you and/or your business, such as creditors, employees, customers, contractors, competitors, other owners, and government agencies.

If you deal with any of these groups as a sole proprietor or a general partner of a partnership, you can be held personally responsible for any business-related lawsuits. A separate business entity may be able to provide you with "limited liability" and protect you from personal liability for such damages and other obligations of the business. There are exceptions, however, if you fail to follow requirements as to how the entity should be set up and/or governed, or if you personally guarantee any obligation of your business.

Entity Number of owners Liability for owners Raising Capital Fringe benefits for owners Income Taxes
Sole proprietorship One Unlimited Owner Non-deductible Passed to owner
General partnership Unlimited Unlimited Partners Non-deductible Passed to partners
Ltd. liability partnership Unlimited Limited Partners Non-deductible Passed to partners
Ltd. partnership Unlimited General partners:Unlimited
Limited partners: Limited
Partners Non-deductible Passed to partners
C Corporation Unlimited None Sell stock Deductible Double taxation
S Corporation 75 None Sell stock Non-deductible Passed to owners
Personal service corp. Unlimited None Owners Deductible Double taxation
Ltd. liability co. Varies None Members Non-deductible Passed to members

As your business grows and your requirements change, the need to reevaluate how your business was formed becomes all the more important.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

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