The modern business model is unlike what it was years ago. Technology developments, innovative strategies, and several other factors have changed business functioning on a massive scale. Therefore, entrepreneurs have to consider different aspects and look after various things to strategize their business plans.
Running a business is far from a piece of cake, and entrepreneurs have to strive hard, push themselves to sustain themselves constantly. However, as much as operating a business is challenging, launching a new venture is a different ball game. While business owners have to make several decisions before entering the market, the most difficult one is to select a business entity type under which they want to operate. The selection of a business entity has an impact on almost all functions of a business. Therefore, new business entrants must carefully choose and weigh the pros and cons before zeroing down on one business entity.
Business Entity
At the core, business entities are structure types that enable businesses to run operations. Contrary to popular ideas, it does not concern what industry is the business or what it does. Business entities, also referred to as business structures, impact their taxes, liabilities, and methods of paying taxes. The reason behind incorporating as a business entity is to ensure that personal and professional assets are kept safe and are separated. Businesses generally incorporate as business entities at the state level. They have to go through a proper procedure that requires them to fill documents and present several papers with an appointed state agency.
Besides this, education plays a critical role for entrepreneurs and their new ventures. It imparts them the required knowledge to run the business operations. Now, several educational institutes offer business degrees that are AACSB accredited and do not require a prior GMAT score. Business aspirants can take advantage of e-education, enroll in AACSB online MBA no GMAT and earn the latest business degree. No requirement of GMAT saves people’s time and allows them to register for professional degrees directly.
Types of Business Entities
Several business entities are there, and people looking to start a business can choose one per their business type and other resources. All business entities have some pros and cons, so it is essential to think through and consider all options. While there are other business entities as well, most businesses choose one of the following business entities:
- General Partnerships: As the name implies, a general partnership consists of two or more partners who share in businesses’ losses and profits and manage the business together. All stakeholders are liable for business debts, and they form a partnership through a written legal agreement.
- Limited Partnership: Limited partnership business entity has two types of business partners. One actively manages a business, runs daily operations, takes decisions, and is liable for all business expenses. The other partner does not have a say in day-to-day decisions and acts as an investor. A limited partnership needs to register with the Secretary of State.
- Sole Proprietorships: It is the most common type of business. It is an unincorporated business. It has either one owner or two as a married couple. Sole proprietorships do not need to register but must obtain licenses or permits if their business requires them. It offers flexibility and has fewer legal limitations. Owners are responsible for business debts, and whether loss or profit, they are the sole bearer.
- Limited Liability Companies: Limited Liability Companies or LLC has one owner or several individuals who come together to run a business. Businesspersons can choose if they want their business as a corporation or a pass-through entity for tax purposes. LLC typically have agreements that contain details, such as assignability of interests and allocation of profits or losses. LLC needs to register with the Secretary of State.
- Corporations: Corporations are independent legal entities that also need to register with the Secretary of State. People who form corporations are not liable for corporations’ debt. The drawback is that people need to keep extensive records of it, and it is expensive. Furthermore, corporations often have to pay double taxes.
Significance of Choosing a Business Entity
Choosing a business entity is a crucial decision as it has far-reaching implications on taxes and business expenses. New entrepreneurs often ask why they need to go through additional work and incorporate their business. Below we are stating some point which will explain how business entities work for companies:
Taxation
Different business entities have different structures for taxes. Corporations are tax-paying entities. C-Corporations are liable to pay taxes separately from owners, whereas S- Corporation is much like a partnership. It is a pass-through entity taxed. On the other hand, LLCs follow a different set of rules, and there are four different ways they can be taxed. LLC entities must consult a professional to get an insight into taxes.
Future Sale
The future salability of companies depends on the choice of business entity. Business owners often do not consider selling business while forming a company; thus, they do not think about taxes on the sale. Some companies can have a partnership structure at a later scale, which is beneficial for them in avoiding tax on phantom gain. Similarly, corporations and LLC separate the personal and business taxes, which may add up to a substantial amount as a payable tax on future selling.
Liability Security
Liability is one of the biggest reasons to choose a business entity, except for sole proprietorship. Business entities offer some level of protection for personal assets from business processes. Since business owners establish themselves as separate entities while incorporating a business other than a sole proprietorship, they are not liable to pay taxes or debts on a personal level.
Sharing and Voting Rights
All entities have a different mechanism for control and ownership. Incorporating a business as a business entity helps in defining roles. Business owners must determine passive owners, people actively running a business, partners who will have a right to vote and share the expenses, profits and losses. Before starting a company, determining all these helps form a business structure and paves the way for the future.
Conclusion
Entrepreneurs may feel overwhelmed as they have to look after multiple tasks even before launching their companies. They may consider not incorporating their companies which may lead to severe consequences. Choosing a correct business entity is essential for the future functioning of a business. It helps save taxes, presents a sharp image to the public, and provides a proper structure to ventures. Entrepreneurs must consider all options before selecting a business entity to protect assets and give form to a business.
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