What Are the Different Types of Legal Entities You Can Use for Your Business?

What Are the Different Types of Legal Entities You Can Use for Your Business?

What are the different types of legal entities? One of the confusing things that people face as business owners, especially when they’re forming and setting up their company is this: “How do I operate my business? I hear all these terms: DBA, sole proprietorship, partnership, or corporation. What are these different ways of running my business?” 

 

Sole proprietorship

There are types that limit liability and types that don’t limit liability. If you’re a sole proprietor, you’re an individual who’s running a business. That can be Joe’s Plumbing or it can be through a DBA, doing business as, or a fictitious business name. 

This means, you can file something, typically on a county-by-county basis in California. You could file a doing business as statement or a fictitious business name statement in Los Angeles county, Orange county, or San Diego county. 

So instead of Joe’s Plumbing, you could file a fictitious business name statement and do business under that name. That gives you a brand and a name you can use for your business legally. However, it doesn’t prevent anyone from suing your business and having personal liability claims filed against you versus your business. 

Corporation or LLC

When you set up a corporation or an LLC, you provide liability protection, where the corporate assets are separate from your personal assets. So, if the business gets sued or goes under, then your personal assets, i.e., the assets of the owner, are safe. 

The types of entities that limit your liability that we recommend are either a corporation or an LLC. An LLC is a limited liability company. They’re both legal entities that are set up by a state filing, i.e., with the state of California, the state of Delaware, or the state of Nevada, where you form a corporation or a limited liability company. 

It’s a separate legal entity that holds all your business assets. It’s the name that you use to do business under and enter into contracts with. So, if anything goes wrong, they go after the legal entity and the assets owned by that legal entity, corporation, or LLC. 

Tax matters

Corporations can be taxed as a C corporation or an S corporation. You may hear a small business owner saying, “What are you? I’m an S corporation.” There’s really no such thing as an S corporation. It’s just a corporation. However, it elected with the IRS to be taxed under sub-chapter S of the Internal Revenue Code. So, it’s taxed as an S corporation. 

In fact, it’s taxed more like a partnership or a flow-through entity and it avoids double taxation, where the corporation would be taxed on profits and then, when it pays the profits to the owner, the owner would be taxed as well. This happens in a C corporation. In an S corporation, you’re only taxed once when those distributions are made to the owner. 

A partnership

Another type of legal entity is a partnership, which can be either a general partnership or a limited partnership. Typically, a limited partnership requires filing with a state. General partnerships, at least in California, can be formed without actually filing anything with the secretary of state. But normally, you’d still have something like a partnership agreement in writing that would say how the business is run, and who the owners are. 

So here are the primary types of structures that businesses are held in: sole proprietorship, which includes people saying that they’re a DBA; a corporation, which can be taxed as a C corporation or an S corporation; a limited liability company, which is commonly referred to as an LLC; or some form of a partnership, either general or limited.

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