Types of Business Entities in Minnesota
This article was penned by guest author Jawaid Hamidzada.
What is a Business Entity?
A business entity is, in its most simple terms, an organization formed in order to conduct business. When deciding which type of entity to choose for your business, it is important to understand that the decision will determine how your organization or company is structured and taxed.
Sole Proprietorship
One such entity is called a ‘Sole Proprietorship’. This type of business entity is the simplest and only requires one person or a married couple as the sole owner and operator of the business. There is no need to register with your state for a sole proprietorship. Simply beginning a business as a sole owner automatically creates a sole proprietorship under the law. However, depending on your business there may be licenses or permits required. Common examples of sole proprietorships are retail stores with one owner who runs the store, freelance photographers or artists, and consultants. However, there are a few downsides to creating a sole proprietorship. Since you are the sole owner, you are liable and responsible for all business debts or legal matters. Further, it is typically harder to receive loans and build business credit.
Limited Partnership
Another type of business entity is a ‘Limited Partnership’. A limited partnership is a registered business entity, and you must file paperwork with the state in order to register. There are typically multiple ‘partners’ and they have two roles. The first type of partner is the one who owns the business and assumes responsibility and legal liabilities. The other partner only invests in the company or business. This investing partner is the ‘Limited Partner’ in the limited partnership. Since they are only investors, they do not have control over the business. Another form of this type of partnership is the ‘Limited Liability Partnership’ or LLP. Most states which an LLP is registered only allow doctor’s officers, accounting firms, or law firms to form an LLP. The benefit to an LLP is that none of the partners have personal liability for the business.
General Partnership
The second partner to the ‘limited partner’ is the ‘general partner’. The general partner is the partner who owns and runs the business. The general partner carries all liabilities and responsibilities for the business. A ‘General Partnership’ or GP is typically the default business type for multiple-owner businesses. In a GP, all partners actively manage and run the business. These partners also share the profits and losses, as well as liabilities.
C Corporation
In a C Corporation, the business entity is separate from the company’s owner. Typically, shareholders and board of directors have full control of the corporation. The shareholders and board of directors usually have officers (C-Suite Executives) who manage the day-to-day operations of the company. It is still possible to create a C Corporation and have one person fill all of these roles. A C Corporation is much more expensive to create than other entity types but are eligible for greater tax deductions and it allows you to offer stock options. Further, shareholders in a C Corporation are not personally liable for any debts or legal matters concerning the company.
S Corporation
Similar to a C Corporation, S Corporations share the same limited liability for its shareholders. However, in an S Corporation, any profits or losses pass through the owner’s personal tax returns. There is no corporate-level taxation for S corporations. Again, S Corporations are much more expensive and tedious to create. Think of an S Corporation as a C Corporation with the tax structure of a sole proprietorship and partnership.
Limited Liability Company
RAM Law is an PLLC, a type of Limited Liability Company or ‘LLC’. An LLC is a mixture of all other types of business entities and give limited liability protections. However, it is much easier to form an LLC than it is to form a C or S corporation because there is minimal paperwork involved. Owners in an LLC do not have personal liability for the business debts or legal liabilities. Further, an LLC may choose how the IRS will tax them, either as a corporation or as a ‘pass-through’ entity. Further, any banks which give a PLLC loans typically create personal liability for the debts.
If you have questions about business formation or are interested in forming your own business, call the attorneys at RAM Law PLLC to set up a free consultation.