Pros and Cons of Different Entity Options
The decision to choose the appropriate legal entity for your business can be a tricky one. There are different types of legal entities that a business can choose, but the question is: why should you choose one instead of the other? In this article, we are going to look at all types of legal business entities and give a broad overview of their pros and cons. However, we shall only dwell on the most important considerations since it is not possible to examine every bit of their features.
1. Sole Proprietorships
A sole proprietorship is the simplest business entity. Most sole proprietorships are handled by one professional in the form of employees or freelancers. Sole proprietors are also assisted by family members to run the business on a daily basis. This form of business entity is viable for many businesses ranging from retail stores to restaurants managed by the owner.
The Pros The following are some of the advantages of sole proprietorship
- Easy to start up—no complicated legal requirements
- You are not charged anything by government entities to start the business
- You are the boss of the business—you call the shots. No complicated and long decision making processes.
- You enjoy the profits alone
- The owner and the business are treated as one. You are responsible for any liability or debt of the business
- Your business income can be deducted to pay personal debts and taxes.
Partnerships are generally owned by two or more individuals. There are two types of partnerships: general and limited partnerships. What happens in general partnerships is that the partners are co-owners of the business and are held responsible for business debts.
- Easy to start up
- Like sole proprietorships, there are no fees associated with creating the business
- In the case of loses, taxes can be deducted from the owners' personal taxes
- The owners are responsible for the losses and liabilities of the busoness
- Owners pay income taxes from the business’ net profit
3. Limited Liability Partnerships (LLP)
Limited partnerships fall into two main categories: those who only act as investors (limited partners) and those who own and operate the company. Limited partiners do not have any control over the company and have very few liabilities. Examples of limited liability partnerships is the real estate investment business.
- Because limited partners have limited liability, it is easy to attract partiers to invest
- General partnerships are preferred when partiers have all the money need to run the business and maintain authority over the business operations.
- In case of limited partnerships, partners can leave the business at any time without interrupting the operations of the business.
- Limited partnerships is more complicated and expensive to form than sole proprietorship or general partnerships.
4. Corporations Corporations are one of the most complicated legal entities. They are entirely independent legal entities that exist independently from the owners of the company. Consequently there are several tax and legal regulations that the company must adhere to including the required forms, fees of incorporations and memorandum of associations.
- The owners and shareholders are not responsible for the company’s debts
- In some cases, the profits/benefits to the owners can be deducted to cater for some expenses. Owners’ responsibility for debts and other liabilities is limited
- If owners and the business share profits, taxes can be lowered.
The Cons It is more expensive to create than other forms of business ownership such as sole proprietorship and partnerships. There is a complicated legal paperwork to be completed when starting the business. The business is treated as a separate entity that must pay taxes.
5. Limited Liability Company Limited liability companies (LLCs) are a blend of the limited liability partinerships and corporations. LLCs free their owners from liability protections so that they do not have to pay double taxes.
- The owners are not liable to pay the debts and liabilities of the company because the company is treated as a separate legal entity.
- The business is run by a team of professionals who are not subject to control and whims of the owners.
- The owners can choose to have the business taxed either as a corporation or a LLC.
- LLCs are more expensive to establish than partnerships and sole proprietorships
You should bear in mind that these are mere generalizations of various legal entities of business. Obviously, there may be some variations that depend on your country and local government regulations; therefore, you should talk to your lawyer or someone who might know these things more than you do to ensure that you are making the right choice.