TYPES OF BUSINESS ENTITIES

There are four basic types of business organizations: the sole proprietorship, the partnership, the corporation, and the limited liability company (the "LLC"). There are variations of these forms. The following is a brief overview to help you choose what type of business suits you best:

Sole Proprietorships

A sole proprietorship is an unincorporated business owned and managed entirely by one person (the "proprietor"), except to the extent that the proprietor may delegate management responsibilities to an employee. It is the simplest form of business. There are no formal requirements for starting a sole proprietorship. As the sole owner of the business, you alone are personally liable for the debts and obligations of the business. The sole proprietorship form of business is most often a default choice used for small, low-risk businesses that have only a few employees and no need for more than one owner.
Disadvantages for a sole proprietorship include unlimited liability & you may have difficulty raising capital.

DBA
A DBA, which stands for Doing Business As, is just another form of a sole proprietorship, wherein you legally register a legal business name for your venture. The governmental body you need to register the name with (and this may be necessary even for sole proprietorships that use the owner's name) varies from state to state.

Partnerships

In simplistic terms, a partnership is a sole proprietorship, except that the partnership is owned and managed by more than one owner. The increase to two owners can complicate planning considerably. There are several kinds of partnerships:

General Partnership
A general partnership has two or more owners, all of whom are "general" partners, and all of whom are personally liable for the debts and expenses of the partnership, including the acts of their partners. Usually, the partners share equally in the profits and losses of the business, but they can agree to a different "split" by stating their sharing arrangement in a written partnership agreement.
The general partnership form of business is used by a few small businesses and service groups whose owners want to avoid the tax consequences that result from corporate ownership, and are willing to accept personal liability.
The advantages for a partnership include its easy formation, profits flowing directly to the owners, benefit of more than one person working the business, and a better chance of raising capital from more than one person.
The disadvantages of a partnership include the liability of all of the partners in case of judgment against the business. Also, the partners are liable for the other partners' actions. Profits of the business have to be shared with other people, disagreements could occur between partners, and the partnership may dissolve on death or withdrawal of one of the partners.

Limited Partnerships
A variation on the general partnership theme is the limited partnership (LP) (which is not the same as a limited liability company, or the limited liability partnership). An LP is a form of business entity that is designed to cure one of the primary disadvantages of the general partnership: the "unlimited liability" problem.
A limited partnership has one "general" and one or more "limited" partners. The general partner is responsible for the management of the partnership and receives a share of partnership profits and losses. The limited partners share in the profits and losses, but are not permitted to have any management responsibilities. In return, their liability is limited to their respective capital contributions to the partnership. The general partner has unlimited liability.

Limited Liability Partnerships
A relatively new form of business organization is the registered limited liability partnership -- the LLP (not to be confused with either the limited partnership or the limited liability company). Partners in an LLP have less liability than partners in a general partnership. LLP partners are not liable for the negligence of their partners, but are still personally liable for their own negligence.

Corporations

A corporation is a separate legal entity owned by one or more shareholders. The shareholders have "limited liability". The shareholders elect directors who have overall responsibility for the management of the corporation.
• "C" Corporations. Regular "C" corporations are formed to gain "limited liability" for the shareholders, and in some cases, to gain an advantage in deducting fringe benefits for the employees.
• "S" Corporations. "S" corporations are most often used by service oriented businesses, which want the "limited liability" feature of the corporation, but do not want the tax consequences of a "C" corporation. These owners want to pay dividends to themselves, because significant amounts of corporate income are not needed for capital needs such as inventory and equipment. The special "S" election allows the owners to pay the dividends without paying the "double tax" problem that occurs when dividends are paid out of a regular "C" corporation.

Limited Liability Companies

1. A limited liability company -- the LLC -- is a form of business entity which combines the "limited liability" feature of a corporation with the often desired tax consequences of a partnership.
The LLC form of business entity is used primarily by small businesses that want:
2. limited liability
3. the tax benefits of a partnership, and
4. freedom from specialized tax rules that govern "S" corporations.


In Conclusion, Ask yourself the following questions before deciding what type of business entity you want to create are:
• Will you pay yourself on a regular basis, or on a draw (i.e. as you need it, and as the business has money to pay you)? In other words, will you become a regular employee of the business?
• Will you have other employees?
• Do you currently have health insurance through your normal employer, or a spouse?
• Do you plan on having other people own stock in your venture?
• What tax bracket are you in personally?
• Does the state you reside in not have a personal income tax?
• Are you planning on being a consultant or contractor?
• Will you have just one client or many?
• Do you plan on moving to a different state any time soon?
• Will you be spending significant resources developing products?

Once you've answered these questions, consult experts - in particular a lawyer specializing in setting up companies, and your accountant. This post was written just to give you an idea or an overview of the various types of business entities.