Guide to Business Entities – California lawyer explains [Free Guide]
Businesses can be categorized by law in several manners. And these classifications matter when it comes to determining how a business is recognized, how it’s taxed, and the personal liability, or lack thereof, of the business owners. Knowing how their business is set up and how it is categorized under the law is crucial for business owners to protect their rights, determine their profit, and protect themselves from liability.
Here’s a brief overview of the different types of business entities. A more comprehensive guide explained by a California lawyer can be downloaded in the link provided below.
An Overview of the Types of Businesses
The types of business structures include the following:
In a sole proprietorship, there is only one owner who has full control of the business and gets 100% of the profits after tax. A sole proprietor and the business are not separate entities. Hence, the sole owner can be held personally liable for business debts, liabilities, and obligations.
When there are multiple owners in a business, the corporate entity can be categorized as a partnership — either a limited partnership (LP) or limited liability partnership (LLP). In the former, only one general partner has unlimited liability while the others have limited liability.
On the other hand, in a limited liability partnership, there is limited liability to all partners or owners. Hence, they are all protected against personal liability.
Limited Liability Company (LLC)
In an LLC, the owners are all protected and are not held personally liable for the debts and liabilities of the business entity. In this type of business structure, the owners are protected, as well as their personal assets.
There are many classifications of corporation, each with different rules when it comes to personal liability.
- C Corp – The business is separate from the owners, which offers protection to the owners against personal liability.
- S Corp – A business entity that is similar to a C Corp, but allows the business to avoid corporate taxes.
- B Corp – Also called a benefit corporation, this type of business operates for-profit.
- Close Corporation – These are similar to B Corps, but their corporate structure is less traditional.
- Nonprofit corporation – An organization that is organized by charities, religious institutions, educational institutions, etc. They do not pay state or federal taxes.
A cooperative is a type of business that’s operated for users who avail of its services. They are owned by members who get a share of the profits made by the cooperative.
Why You Need to Know Your Type of Business Entity
It’s important for business owners to know how their business is set up in order for them to properly understand their rights, liabilities, and obligations under the law. Without the proper business structure, business owners can be held personally liable for the debts of the business and risk their home, car, finances, and future in case of issues with their company.
Knowing the categorizations of businesses and how they work can make businesses more aware of what to do to protect themselves.
Download Your Free Guide to Business Entities
I have created a comprehensive guide to selecting a business entity that covers everything a business owner needs to know to set up their business, whether as a sole proprietor, an LLC, partner, or corporation.
Get the guide by submitting your email address in the following link and waiting for a copy in your email.