What Is A Business Entity? - What You Need To Know

What Is A Business Entity? - What You Need to Know
Written by: - Phil Baker

Have you found yourself wondering what a business entity is? Maybe you have heard others talking about it and want more information? Whatever reason brought you here, we have the answer for you! 

We know how tricky it can be to navigate the world of business entities. You can quickly find yourself overwhelmed and unsure who to trust or what to believe. You can scroll and scroll for hours on end, never knowing what the right answer is. 

Well, no more! Today we have the answer for you. Keep reading to find out what a business entity is and everything you need to know about them.

Also read: Get The Insights - How To Get A Business Loan With No Sweats!

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What Is A Business Entity?

The term "business entity" refers to the legal structure of an organization. It's not just about the type of business you are in, but also how that business is organized and operated.

A business entity can be:

With this in mind, let's look at the different business entities in more detail. 

Also read: How To Organize Your Financial Records In 5 Easy Steps


Why Form A Business Entity?

There are many reasons why people form businesses. Some may want to start a new venture, while others may want to expand their existing business.

Whatever your reason for starting up a business, it's important to understand what kind of business you're setting up and what your startup structure is. This will help you decide on the right business entity for your needs.

The most common types of business entities include:


Sole Proprietor

A sole proprietorship is owned by one person. They are often referred to as single-person businesses because they have only one owner.

In some cases, a sole proprietorship can be set up without any formalities, although there are usually rules around who can own them.

For example, if you are a resident of Australia, you cannot be the sole proprietor of a business unless you are over 18 years old. If you are under 18 years old, then you must have a parent or guardian sign the incorporation papers.

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A partnership is made up of two or more people. Each partner owns a share of the profits and losses of the business.

Partnerships are very popular with small businesses, especially those where the owners don't need to split their time between work and family life.

There are no restrictions on partnerships in terms of age, so anyone can become a partner. However, partners must agree to certain things before forming the business. These include agreeing on the division of responsibilities within the partnership, such as managing finances and marketing.

Also read: Have You Figured Out What To Ask The Employees Leaving Your Company



A corporation is similar to a partnership, except that instead of being owned by multiple people, it has one shareholder.

Corporations are typically formed when someone wants to raise capital from investors. When raising money through shares, the investor becomes a shareholder in the corporation.

As a result, he/she has a say in how the business operates. Shareholders can elect directors to run the business, and these directors make decisions about everything from hiring employees to paying dividends.

Also read: How Much Do You Understand Tax On Bonuses?


Limited Liability Company (LLC)

An LLC is a hybrid between a corporation and a partnership. Like corporations, LLCs are owned by shareholders, but unlike corporations, they do not have unlimited liability. Instead, they have limited liability.

This means that the personal assets of the shareholders are protected against claims by other parties. It also means that they are not personally responsible for debts incurred by the business.

The main benefit of an LLC is that it allows the owners to keep their assets separate from the business.


Limited Liability Partnership (LLP)

An LLP is similar to an LLC, except that it does not have unlimited liability. Unlike an LLC, an LLP does not protect the personal assets of its members. Instead, it protects the assets of the firm. This means that the assets of the LLP are used to pay off creditors.


Let's Take a Look At An LLC In More Detail

An LLC has many advantages over other types of entities. It provides the benefits of both a corporation and a partnership without the disadvantages of either.

In addition, it allows members to have unlimited personal liability for their actions while still having limited liability for the actions of others.

This means that if your LLC does something wrong, only its owners will be held liable, and they won't have to pay out any money to anyone else.

An LLC can be set up as a pass-through entity, which means that all profits and losses flow through to the owner(s), or it can be set up as an operating entity, meaning that the LLC owns assets such as real estate, inventory, equipment, etc., and then uses those assets to generate income.

If you choose to form an LLC, there are some things you need to know before doing so. First, you must decide whether to operate the LLC as a pass-through or an operating entity.

Second, you'll want to determine what kind of entity you want to create. Finally, you'll need to consider who should serve on the board of directors.


How To Know Which Business Entity To Choose When Starting A Business?

Choosing the right type of business entity depends on several factors. However, the most important factor is how much risk you're willing to take with your business.

For example, if you plan to start a small business, you might prefer an S Corporation because this type of entity limits the amount of tax you owe. However, if you plan to open a large chain of restaurants, you might prefer a C Corporation because it offers more flexibility than an S Corporation.

Another important consideration is how much control you want to give up when starting a new business. If you don't want to be involved in day-to-day operations, you may want to use an LLC instead of an S Corporation.

Finally, you may want to consider the legal structure of your potential competitors. For example, if you plan on opening a restaurant, you may want to avoid using a Limited Liability Company because it could make it difficult for your competitor to sue you.


What Is A S And C Corporation?

There are two different ways to organize a company: as an S Corporation or as a C Corporation. These terms refer to the way the IRS classifies the organization.

When choosing between these two options, you should first ask yourself why you would like to incorporate them. The main difference between the two types of corporations is how they handle taxes.

The S Corporation is taxed differently from the C Corporation. In particular, the S Corporation pays no federal corporate income tax, but rather distributes its earnings to shareholders. This means that the S Corporation's owners receive dividends from the company.

The C Corporation, however, pays federal corporate income tax at regular rates. As a result, the C Corporation keeps its earnings and doesn't distribute them to shareholders.

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Final Thoughts

The choice between different types of business entities depends on the size of your business, how much risk you're comfortable taking, and how much control you want over your company.

When choosing the best business entity for your needs, remember that each option comes with pros and cons. Be sure to weigh these options carefully before making your decision.

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