For those unaware of the best course of action, it’s usually recommended to consult a business attorney to discuss business structure options. In this article, more of the specific benefits and advantages of incorporating a business are discussed below. Census Bureau, roughly 45,000 corporations submit business licenses each month. In April 2024, just over 50,900 applications from corporations were submitted. An LLC with a sole owner is called a single-member LLC and an LLC with two or more owners is called a multi-member LLC. An involuntary liquidation is triggered by the creditors of a corporation that has failed to pay its bills.

For example, incorporating in a different state may require you to file a foreign corporation. On the other hand, filing in a different state may reduce the fees and reporting requirements needed to establish and maintain the corporation. When choosing your business entity consider how much personal liability you want. Consider your personal assets and how high-risk your business activities are. Corporations can have only owner (called a single-member corporation) or multiple owners (called a multi-member corporation).

Person

The choice of business entity can affect various aspects of the business such as taxes, liability, ownership, and governance. Remember, sole proprietorships and general partnerships offer no legal protection while a limited liability company and corporation offer some level of legal protection. You might come across yet another business entity structure called a limited liability partnership, or LLP. These types of businesses can organize as an LLP to avoid each partner being liable for the other’s actions. For example, if one doctor in a medical practice commits malpractice, having an LLP lets the other doctors avoid liability. As the name implies, a sole proprietorship is a one person business entity.

A company appoints a liquidator who sells the corporation’s assets. The company pays off its creditors and distributes any remaining money to the shareholders. A traditional business plan has a lot of details, including a summary of the company, how it plans to succeed, market information, management, products and services, marketing, and sales projections. business process flowchart symbols Corporations are considered to be juridical persons in many countries, meaning that the business can own property, take on debt, and be sued in court. When starting a business, one of the first things you want to do is choose the structure of your company — in other words, choose a business entity type.

Tax treatment

Over time, different legal structures such as sole proprietorships, corporations, and limited liability companies (LLCs) emerged. A company does not need to be incorporated to operate a business. Business owners may elect to operate as a sole proprietorship, partnership, or limited liability company (LLC) instead. These business structures treat company debt and taxes differently than compared to an incorporated entity. A general partnership is an unincorporated business with two or more owners. It’s the default form of ownership for businesses with multiple owners.

1. The company reported net sales of $394.33 billion for the 12 months ending Sept. 24, 2022.
2. Business plans are essential to running your business and can help you secure the funding you need to start your operations.
3. If an LLC only has one business owner, then it’s taxed like a sole proprietorship.

How to choose a business entity type

A sole proprietorship is not incorporated, avoids double taxation, and does not provide any liability protection. There are tax considerations to make regarding paying yourself a wage or salary as business owner as opposed to taking a draw or equity distribution. You may want to consider double taxation when deciding whether to pay yourself or not. Remember income is taxed when a corporation earns it and again when it’s paid out to the owners. So if you’d like to delay the personal income taxes on the money, it may be wise to only pay yourself when needed. Incorporation effectively creates a protective discount on notes payable bubble of limited liability, often called a corporate veil, around a company’s shareholders and directors.

Decide Where to Operate and Comply With Local Laws

Jurisdictions impose residency, citizenship, age, and type of person restrictions. Your type of legal entity might also limit the number and type of investors or owners. For example, maybe the growth strategy means that the company will retain profits and not distribute them. A limited liability company might be a disadvantageous form in that case.

It offers legal protection, but has pass-through taxation, meaning earnings are only taxed once. Another factor to consider is that both LLCs and corporations have tax flexibility which means you can choose how the business is taxed. For example, you can ask to have your LLC taxed as an S Corp, which could lower self-employment taxes. There are many business entities out there, but not all of them are right for the self-employed.