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4 most common types of business entities

Starting a business is no easy undertaking. Though you may have a strong business idea and feel that you could bring value to the business world, you also likely know that most individuals looking to start their own companies feel this way. Additionally, you certainly also know that many small businesses and startup companies do not find the success their owners were hoping for.

Despite the challenges ahead, the mishaps of others have not deterred you from wanting to move forward with creating your company. Your headstrong attitude may play a considerable role in getting your company off the ground. However, you will need to make a number of decisions before your business can form, and choosing the right entity structure could make a considerable difference in other business decisions.

Different business entities

In general, four common types of business entities exist. The main differences between the options relate to the financial liability placed on you and the company. Because such liability can substantially affect your business in the event of an issue, choosing the right entity should not be taken lightly. Your four most common choices are as follows:

  • Corporation: With a corporation, your company becomes separate from you as founder. Therefore, you hold no personal liability in terms of financial gains and losses. Instead, the corporation itself faces taxes, makes a profit and holds liability for any actions carried out. Though you free yourself from liability with this option, it can prove costly to create.
  • Partnership: Perhaps your business idea came not only from yourself but from other individuals as well, or maybe you feel the need to bring in assistance to share in your company's successes and failures. In cases where you do not plan to move forward as the sole proprietor, a partnership could act as a viable option. However, each individual holds financial liability for the company.
  • Sole proprietorship: If you neither wish to move forward with partners nor feel that a corporation suits your needs, you could potentially find a sole proprietorship your best option. This avenue stands as the most common business entity created and allows you to maintain control of your company. With this option, you would also maintain sole financial liability.
  • Limited liability company: Creating an LLC is becoming a more popular option in the business community. This route seems attractive to many parties because it can help individuals to avoid personal financial liability for the company's actions.

As you can see, different business entities each have their pros and cons. In order to determine which option could best suit the needs of your company and yourself, you may wish to find out more information on business formation. Discussing your concerns and interests with legal professionals may prove useful.

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