Three Company Entities Explained

The type of business entity that you choose can impact the taxes you are liable to pay and also your legal protection. This makes it especially important to ensure that the entity you choose is right for your business.

Here we give a balanced snapshot summary of three of the key business entities – Limited Liability Company, sole proprietorship and general partnerships – to help you consider which could be most suitable for your business needs.

Sole Proprietorship

Sole proprietorship is often described as the simplest way to set up a business – especially for an entrepreneur. Each asset of the business is solely owned by the proprietor and the business is looked at as an extension of the owner. You may choose to have other people working for you but all profits made (subject to tax deductions) are your own.

This type of entity also tends to be more straightforward to set up as you may not be required to pay some of the registration fees that you would with a limited liability company. You also have freedom with all decisions made regarding the finances of your business and you can choose how to raise funds; whether to take out external loans or use your own assets.

However as well as the profits, you will also be liable for any debts and losses incurred by the sole proprietorship. If the business should run into financial difficulty, that responsibility will fall on your shoulders. This is an obvious risk for those with bank loans – should your business fail, you will be personally required to repay them.

Partnerships

The set-up of a general partnership is similar to that of a sole proprietorship but run with two or more owners, each of whom has individual liability for all the business’ debt. Should one partner walk out; it may be down to the other partner to meet the rest of the costs.

Limited liability partnerships limit the responsibility that each partner has to the amount that they have invested in the business, offering a degree of protection because unlike general partnerships the individuals designated as partners will not hold personal liability for certain partnership liabilities. However to become a limited liability partnership, you will need to register with your Secretary of State’s office and follow the relevant regulations.

Limited Liability Company

Setting up a limited liability company follows a different procedure. Owners take on a separate legal identity, offering a degree of protection to their personal assets and finances. A limited liability company must be registered with your Secretary of State office and documents must be prepared and submitted in line with their regulations. A tax will be charged on profits made by the company.

There are a number of regulations surrounding limited companies such as shareholder requirements and minimum trading amounts which mean that it may not be the right option for everyone.

Choosing the right entity for your business needs

In order to work out the best option for your business, you need to consider the tax, administrative and financial requirements of the business and which entity will suit these most closely.

It also depends on the nature of your business, if you are looking to work alone, for example by offering work as a consultant, then a limited liability company could be unnecessary and a sole proprietorship entity may meet your needs instead. But if you are looking to grow your business, a limited liability company may be your best bet.

John T. Hughes writes for Juniper Accountancy, a Bristol accounting firm. As chartered Bristol accountants we can provide your business with a complete end to end service to take care of all your accounting and tax needs.