What are the different types of business entities?

A critical step in starting a new business is choosing the correct business entity for your company from the different types of business entities. Forming a separate business entity when embarking on a new business venture is crucial to limiting liability for the owners. The separate business entity, not the individual, performs the work. In the United States, the two types of business entities that operate as separate legal entities are corporations (also known as INCs) and Limited Liability Companies (also known as LLCs).

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What are the different types of business entities that I use?

Corporations and Limited Liability Companies are the types of business entities that I use in all my activities. The benefits of limiting risk and exposure far outweigh the small cost of incorporating them in the different states. In my opinion, limiting risk when operating a business or owning real estate is paramount to long-term success. As all the companies operate as separate entities, one torpedo (a lawsuit, for example) can’t sink the ship.

Corporation

A corporation is probably the best-known business entity of all the different business entities. Ownership comprises different shareholders (or even just one shareholder) that own different shares of stock in the company. In larger corporations (like publicly traded corporations, for example), a board of directors hires and oversees management. Management, in turn, hires and supervises employees that work for the company.

A corporation is a separate legal entity that exists separately from its shareholders. This legal entity can buy property, open bank accounts, sue or be sued, and enter into contracts. Stockholders can sell or transfer their stock to others, and the corporation is perpetual, continuing even in the change of ownership. As it is a separate legal entity, there is limited personal liability for the company stock shareholders.

Every state is different, but I will use Florida as an example. In the State of Florida, it costs $70.00 to start a company ($87.50 if you want an optional certificate of status and a certified copy of your filing). You can file online and have your confirmation in 2-3 business days during non-peak periods.

Limited Liability Company

Limited Liability Companies (LLCs) are sometimes called the “easy” companies in that you typically don’t have to have all corporations’ corporate formalities. LLCs are not required to have board meetings, stockholder meetings, or management meetings and all of the associated complexities.

Instead of stockholders, LLCs have members (or even one member) with membership interests. These members have limited personal liability, as the LLC is a separate legal entity. LLCs can buy and own real estate, secure loans, open bank accounts, enter into contracts, and virtually anything a separate legal entity can perform.

Using Florida as an example again for filing, it costs $125.00 to open a new LLC ($160.00 if you want the optional certificate of status and certified filing copy). You can file online and have your confirmation in 2-3 business days during non-peak periods.

Other types of business entities

Other types of business entities exist that do not limit one’s liability and have different complexities. I personally don’t see the benefits of any of these types of entities, and I generally avoid them, but here is an overview of each type.

General Partnership

A general partnership divides the responsibilities among all the general partners (minimum of 2 partners). Each general partner is responsible for the partnership’s debt and has unlimited liability. Each of the general partners can act on behalf of the entire partnership.

Limited Liability Partnership

A Limited Liability Partnership (also known as an LLP) is a hybrid of a general partnership and a corporation. In this structure, the general partners operate the business (and have unlimited liability), and the limited partners invest money with no say in the day-to-day operations and have limited liability exposure.

Some larger partnerships reduce risk by having a corporation act as the general partner, limiting the liability to the general partner corporation. They can still use the limited partner model to raise capital while reducing liability exposure.

In the State of Florida, it costs $1,000 to file a new limited partnership ($1,061.25 if you want to have the optional certified copy and certificate of status).

Sole Proprietor

I don’t consider a sole proprietorship a company.

In Florida, it is even described as an “unincorporated business.” One person operates it, and there is no distinction between the “business” and the owner. The owner is exposed to unlimited liability and has no benefits from any corporate structure.

In Florida, you must register the “fictitious name” under which your sole proprietorship is operating at $50.00 ($90.00 if you want the certified copy of fictitious name registration and the certificate of status for fictitious name registration). It costs $2.50 more to file for a sole proprietorship in Florida than filing for a new corporation!

Non-Profit Organization

A non-profit is an organization formed for charitable, educational, religious, or other similar purposes and is exempt from paying income taxes.

Non-profit organizations can generate revenue, but all the money they earn must be used to support their mission and not be distributed to members or shareholders.

Since this is Levered Income and we are looking for ways to lever income, it does not apply to our use case. I listed it as one of the types of business entities for reference only.

Corporations and LLCs versus other types of business entities

There are so many different types of business entities; how can I choose the right one?

Although each person’s situation is different, the benefits of reduced liability, simplicity and low cost make LLCs the primary choice for my businesses from the different types of business entities. LLCs are easy to form and easy to manage, and they protect you in the long run.

Figured out which type of legal entity fits your business and interested in starting your own company but intimidated by the paperwork?

If you are interested in an LLC or a Corporation as the types of business entities that you are considering, Namecheap and Relate Legal have partnered up to make it easy and inexpensive for you. You can check them out here.