Types of Business Entities: Everything You Need to Know | Tailor Brands (2023)

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With so many complexities involved in launching a new business, the last thing you need is confusing information about which entity to choose.

In simplest terms, a business entity (also called a business structure) refers to the structure of a business. The type of business entity you choose influences everything from day-to-day activities, taxes, and personal liability.

Choosing a business entity is one of the first things you do when starting your own business.

I will cover the basics of business registration, the different types of business entities, the pros and cons of each, and how to choose an entity that is best for your company.

What is Business Registration?

Registering a business ensures no one else can open a company in the same structure. By registering your business, it becomes a legal entity with specific legal rights.

Choosing the best business structure is about finding a balance that’s right for you. Your choice of business structure determines how you register and operate your business, setup costs, how you file your taxes, which taxes you’ll pay, and your level of personal liability

Do you have to register your business?

That depends on which business structure you choose and your location. For example, if you operate as a sole proprietorship using your legal name, you’re not required to register anywhere.

And for many small businesses, registering your business name with your state and local governments is sufficient.

When you know which business structure to use, your legal requirements will become clear.

(Video) The Different Types of Business Entities in the U.S.

The Most Common Types of Business Entities

There are more than a dozen different types of business entities in the U.S. But most SMBs (small and medium-sized businesses) choose from the five most common options: Sole Proprietorship, general partnership, limited partnership, limited liability company (LLC), and C corporation

Let’s review each one to understand which is right for you.

1. Sole proprietorship

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A sole proprietorship is the simplest business entity in which one person is the sole owner. Many freelancers, consultants, even a one-man retail store, and other service professionals commonly work as sole proprietors.

There is no need to register with the state, however, depending on your industry and location, you might need a local business license or permit. You can find that out by looking at your state’s website.

Pros of sole proprietorship

1. Simplicity. If operating under your legal name, you can begin business immediately.

2. You’re the boss.All decisions are yours to make.

3. Pass-through taxation. Also called a flow through entity, any income your business makes passes directly to you. Plus, it qualifies you for a 20% tax deduction (qualified business income deduction).

4. Reduced hassle with the IRS. You’re not required to provide end-of-year balance sheets or file an end-of-year financial statement.

Cons of sole proprietorship

1. Legal liability. Since there is no legal distinction between you and your business, you are personally liable for all the business’s debts and liabilities.

2. Access to funding. Investors are less likely to lend to an individual, so it might be difficult to get a business loan.

3. Public perception. Depending on your business, clients often prefer working with registered companies.

(Video) Business Structure - Choosing the right Structure for your Business

2. General partnership

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Partnerships are similar to sole proprietorships, except it has two or more business owners. Each person actively operates in the business, as well as share the profits and losses of the business.

Many people form partnerships to lower the risk involved in starting a new business. And having business partners can be very helpful when getting started.

Pros of general partnership

1. Simplicity. Partnerships are an uncomplicated business to start, and they are relatively simple to run.

2. Partners control the business. A partnership allows the owners to run the company directly and allocate profits as they see fit.

3. Flexibility. Partners can share duties, so everyone works to their strengths.

4. Reduced liability. The more partners involved, the less liable you’ll be if things go wrong.

5. Pass-through taxation. Partnerships arepass-through entities and can qualify for a 20% business income deduction. Each partner only pays tax on the percentage of profit taken from the business.

Cons of general partnership

1. Legal liability. All partners are accountable for the company’s debts and liabilities.

2. Conflict. We all have our own opinion on how to run a business; the more partners there are, the more opinions (and possible disputes) there may be.

Since a general partnership is the default mode of ownership, there is no need to register with the state. You may have to file a doing business as (DBA) when registering your name. Check that out on your state registration website.

3. Limited partnership

Limited partnerships (LP) have one general partner with full liability, and all other partners have limited liability. Limited (or silent) partners provide capital but have limited control over the company; they are also not responsible for any debts beyond their initial investment.

(Video) Legal Basics and Business Entity Formation: Crash Course Business Entrepreneurship #5

LPs are a good option for those who want the simplified taxation of a general partnership and are looking to raise capital investment.

Pros of limited partnerships

1. Raising investment. You can raise money from investors who serve as limited partners while you maintain authority over business operations.

2. Pass-through taxation. LPs are pass-through entities, simplifying taxation and enabling you to claim the 20% QBI deduction. However, LP tax treatment varies from state to state, so check out your state website for more information.

Cons of limited partnerships

1. Liability. General partners are personally responsible for any debts and other liabilities.

2. Limited availability. Not all states allow the formation of an LP, and some reserve it for certain types of businesses.

3. Complex to set up. Establishing an LP can be complicated and requires state-by-state research. Any limited partners’ investment and shares are seen in law as securities, making them subject to state and federal security regulations.

Forming an LP is dependent on your state and industry. Generally, it will require specific licenses and permits. Find out which ones you need by looking at the SBA Business Licenses and Permits search tool.

4. Limited liability company (LLC)

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An LLC is a popular business structure for those in a high-risk business, owners with personal assets they want protected, and for those who want to pay a lower tax rate than they would with a corporation.

Pros of LLCs

1. Limited liability. Your personal assets (vehicle, house, savings account, etc.) are not at risk. However, if you sign as a guarantor to obtain a loan, you are liable for the amount borrowed.

2. Public perception. People often hold an LLC in higher regard than a non-legal business entity, making it easier to gain a prospective client’s trust.

3. Taxation flexibility. You can choose to pay taxes as a sole proprietorship, meaning you`re seen as a pass-through entity and can qualify for the 20% QBI deduction. However, you can choose to be taxed as a corporation, offering flexibility as your company grows.

Cons of LLCs

1. Setting up and filing fees. Depending on your state, it can cost anywhere from $100 to $1,000 to register an LLC.

2. Minimum annual tax. Your state might have a minimum yearly tax charge, regardless of whether you turn a profit.

3. Annual report filing. Most of the 50 states require LLCs to file an annual report. Failing to file often leads to penalties, late filing fees, and in the worst-case scenario, your LLCs dissolution.

To form an LLC you must file articles of organization with your secretary of state and provide an LLC operating agreement.

If you’re a one-member LLC, the IRS treats you as a sole-proprietorship when it comes to taxes, meaning the LLC doesn’t pay taxes and doesn’t have to file an annual return. As a sole owner, you can report your profits and losses using Schedule C, submitting it with your personal 1040 tax return.

5. C corporation

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A corporation is a legal entity that is separate from its owners. A C corp is fully independent from the shareholders, so if a shareholder leaves the company or sells their share, the C corp can continue business as usual.

It’s important to note that there are other corporations, including an S corporation, B corporation, close corporations, and nonprofit corporations.

Pros of a C corporation

1. Limited liability. A corporation is a separate legal entity with assets and liabilities of its own. The liability of its shareholders is generally limited to the amount they invested in the business.

2. Access to capital. C Corporations can acquire financial capital by issuing stock to other businesses or individuals, both domestic and foreign. Shareholders can receive payments in stock benefits and buy stock at fixed prices.

3. Self-employment taxes. Shareholders who actively work in the business are taxed as employees, thus avoiding self-employment tax. Profits can remain in the corporation as equity and be distributed as shares and dividends.

Cons of a C corporation

1. Complexity and costs. Forming and maintaining a corporation is complex and expensive.

2. Two-layered taxation. Corporations pay a double tax. Profits are subject to corporation tax, and shareholders who earn a dividend or take a salary pay personal income tax.

3. Less control. As ownership is shared among shareholders and governed by a board of directors, no single person controls the business.

4. Regulatory requirements. There are a lot of federal and state regulations placed on a corporation and they are closely scrutinized. Corporations must disclose annual earnings and internal governing documents to its shareholders.

Registering a C corporation varies between states, but all require you to file Articles of Incorporation and issue stock percentages to its shareholders. Forming a corporation is a complicated procedure that must adhere to numerous state and federal conditions, making it an expensive and time-consuming process that requires a legal team to implement. All corporations are regulated under their state’s corporate law.

(Video) Business Structure: How to Choose the Best Entity for You

And That’s a Wrap

Choosing a business entity is one of the first important decisions a new business owner makes.

By referring to this guide, you’ll be able to determine which structure is right for your business. And, of course, if you need specific help for your business, it’s best to consult a legal or financial professional.

It’s all about balancing what’s good for you and your business now, and you can always upgrade your structure in the future.

This portion of our website is for informational purposes only. The content is not legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information as well as has not been evaluated the accuracy and/or completeness of the information.

(Video) Insurance Companies


Types of Business Entities: Everything You Need to Know | Tailor Brands? ›

Types of Business Entities. U.S. state governments recognize many different legal entity types, but most small businesses incorporate under one of five entity types: sole proprietorship, partnership, C corporation, S corporation, or limited liability company (LLC).

What are the 5 entity types? ›

Types of Business Entities. U.S. state governments recognize many different legal entity types, but most small businesses incorporate under one of five entity types: sole proprietorship, partnership, C corporation, S corporation, or limited liability company (LLC).

What are the 5 entities of a business? ›

Most business owners will choose from the six most common options: sole proprietorship, general partnership, limited partnership, LLC, C corporation or S corporation. Below, we've explained each of these popular business entity types, as well as the pros and cons of choosing each particular structure for your company.

What are the 4 types of entities? ›

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation.

What are the 3 basics types of entities? ›

The 3 Basic Business Entities

The 3 types of business entities that are most common are the sole proprietorship, limited liability company (LLC), and corporation. Each has their own distinct advantages and disadvantages, depending on what you and your business need.

What are business categories? ›

A business category is a high-level business area that helps to organize business terms. Business categories provided with IBM Industry Models are defined in Information Governance Catalog (IGC) as categories with properties that describe in business language the meaning of the business category.

What are the basic entities? ›

The four basic entities are data, information, knowledge, and wisdom. The order of the entity as specified is important. Each entity is transformed to the next higher one during entity processing (information processing).

What entity type is Amazon? ›

LLCs, or limited liability companies, are a popular choice for Amazon sellers. In fact, Amazon itself is an LLC. So why would you choose an LLC for your Amazon business? Let's address the positives and the negatives of forming one of the most popular entities for small businesses.

How to structure a company? ›

How to Structure Your Business: 9 Tips For Structuring New...
  1. Determine Your Level Of Involvement.
  2. Separate Intellectual Property And The Business Itself.
  3. Just Structure It.
  4. Determine How Personal Factors Affect The Business.
  5. Consider Your Future Funding Needs.
  6. If You Need Investment, Start With A C-Corp.

How do you identify entity types? ›

How to identify entity from a given problem
  1. Search for nouns, like Teacher, Doctor, etc.
  2. Classify nouns to get a wider picture about the entities.
  3. Read the problem description repeatedly.
  4. Entities are like Persons, Students, Teachers, Courses.
Jun 15, 2020

What are the six types of enterprise? ›

Six major types of business structures
  • Sole proprietorship.
  • General partnerships.
  • Limited liability partnership.
  • Limited partnership.
  • Limited liability company.
  • Business corporations.

What are 3 types of business operations? ›

Understanding Business Activities. There are three main types of business activities: operating, investing, and financing. The cash flows used and created by each of these activities are listed in the cash flow statement.

What are the 10 types of business ideas? ›

Top 10 Most Successful Businesses to Start
  • Virtual Assistant Service. ...
  • Social Media Management Service. ...
  • Web Design Agency. ...
  • Coffee Shop. ...
  • Sell Online Courses. ...
  • Affiliate Marketing. ...
  • Home Tutoring. ...
  • Video Editor.

What are the 7 part of a business? ›

So let's get started. First, you're going to break down your business performance for the first half of the year into seven key areas: Sales, Expenses, Cash Flow, Employees, Technology, Marketing and Big Picture.

What are the 10 types of business environment? ›

Types Of Business Environments
  • Internal business environment. ...
  • Economic environment. ...
  • Technological environment. ...
  • Socio-cultural environment. ...
  • Competitive environment. ...
  • Legal environment. ...
  • Political environment. ...
  • Natural environment.
Sep 30, 2022

How many entity types are there? ›

An entity can be of two types: Tangible Entity: Tangible Entities are those entities which exist in the real world physically. Example: Person, car, etc. Intangible Entity: Intangible Entities are those entities which exist only logically and have no physical existence.

What are all types of entities? ›

Different Types of Entities in a Business
  • Sole Proprietorship. Sole Proprietorship is when there is one owner of the business. ...
  • Partnership. Partnership is when there are multiple owners of a business. ...
  • HUF. Hindu Undivided Family (HUF) is a type of entity which exists in India only. ...
  • Joint Venture. ...
  • Corporations.

What are types of entity models? ›

There are two types of Entities in Entity Framework: POCO Entities and Dynamic Proxy Entities.

How do I classify my business? ›

Review common business structures
  1. Sole proprietorship. A sole proprietorship is easy to form and gives you complete control of your business. ...
  2. Partnership. Partnerships are the simplest structure for two or more people to own a business together. ...
  3. Limited liability company (LLC) ...
  4. Corporation. ...
  5. Cooperative.

What is business category 12? ›

Category 12 (wood destroying pest inspection) includes: Inspectors and pest inspection businesses that inspect and issue reports for termites, wood infesting beetles, carpenter ants, carpenter bees, and wood decay fungus.

How are enterprises classified? ›

The three classifications of business include primary sector, secondary sector, and tertiary sector business.

What are examples of services entities? ›

Examples of service businesses include companies engaged in transport, food service, distribution, retail, and other industries that sell services rather than products. These intangibles provide the primary revenue source for service businesses.

What does entity mean programming? ›

An entity is a lightweight persistence domain object. Typically, an entity represents a table in a relational database, and each entity instance corresponds to a row in that table. The primary programming artifact of an entity is the entity class, although entities can use helper classes.

What is an entity in computer science? ›

An entity is any singular, identifiable and separate object. It refers to individuals, organizations, systems, bits of data or even distinct system components that are considered significant in and of themselves.

What is a marketing entity? ›

Marketing Entity means the configuration information of a MarketingAction (i) indicated by the User on a Distribution Platform, (ii) identifiable by a unique ID chosen by the User and (iii) which aims at triggering the related Marketing Action (such as marketing campaigns, experiments, etc).

Why do companies have so many entities? ›

What's the primary purpose of a multiple business entity strategy? Asset protection. If you own assets then you want to have a holding company that has no liabilities other than to you personally, and that has no direct interaction with customers of your operating company.

What are strong entities? ›

What is a Strong Entity? A strong entity is an entity that is not dependent on any other entity. It has a primary key, or a table includes a primary key.

What entity type is a company? ›

Company. A company is a legal entity that is separate from its owners – meaning owners are not typically personally liable for the debts of the business. Registered companies require at least one director, who is responsible for managing the company's operations.

Do I need an LLC to sell on Etsy? ›

If you're based in the US, you can either operate your Etsy shop as an unincorporated entity — a sole proprietorship or a general partnership — or you can incorporate and form a corporation or a limited liability company (LLC). Sole proprietorships and general partnerships are the two simplest options.

Is Apple an LLC? ›

Apple Enterprises, LLC.

How do I build my company? ›

Starting a business can seem like a lot, but following these steps will help make sure you're successful:
  1. Make a business plan.
  2. Secure funding.
  3. Surround yourself with the right people.
  4. Follow the right legal procedures.
  5. Establish a location.
  6. Develop a marketing plan.
  7. Build your customer base.
  8. Plan to change.

What is an example of an entity? ›

Examples of an entity are a single person, single product, or single organization. Entity type. A person, organization, object type, or concept about which information is stored.

What is the key of an entity type? ›

An entity key is a property or a set of properties of an entity type that are used to determine identity. The properties that make up an entity key are chosen at design time. The values of entity key properties must uniquely identify an entity type instance within an entity set at run time.

What are the 5 main functions of a business? ›

What are the Five Core Business Functions? Core business functions are five key areas that you must execute in addition to your primary function. They are human resources, finance, marketing, sales, and strategy. These are universal functions, which means that they are necessary for the success of any business.

What is the best form of business organization? ›

The sole proprietorship and the partnership are the most straightforward business organization types. When one partner leaves the business, it is dissolved unless there is an agreement in place that allows it to continue.

What are the 5 entrepreneurial enterprises? ›

So there are five real startup types. Lifestyle startups, small businesses, high growth companies, intrapreneurship ventures, and social ventures. Let's go through each of those.

What are the 6 areas of business operation? ›

Generally, the six functional areas of business management involve strategy, marketing, finance, human resources, technology and equipment, and operations.

How many types of business are there? ›

Typically, there are four main types of businesses: Sole Proprietorships, Partnerships, Limited Liability Companies (LLC), and Corporations. Before creating a business, entrepreneurs should carefully consider which type of business structure is best suited to their enterprise.

What do you call a business that sells products? ›

retailer. noun. a person or company that sells goods directly to the public for their own use.

What are the types of entities? ›

An entity can be of two types: Tangible Entity: Tangible Entities are those entities which exist in the real world physically. Example: Person, car, etc. Intangible Entity: Intangible Entities are those entities which exist only logically and have no physical existence.

What is the most common entity? ›

The most common business entities include:
  • Sole Proprietorships or "DBA"
  • Partnerships.
  • Limited Liability Companies (LLC)
  • Corporations.
  • Cooperatives.
  • Professional Entities.

What are example entities? ›

Examples of an entity are a single person, single product, or single organization. Entity type. A person, organization, object type, or concept about which information is stored.

What is a strong entity? ›

What is a Strong Entity? A strong entity is an entity that is not dependent on any other entity. It has a primary key, or a table includes a primary key.

What are the most popular business entities? ›

The most common business entity types are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here's more about each type of legal structure.

What is the biggest business entity? ›

1WalmartUnited States
2Amazon.com, Inc.United States
3State Grid Corporation of ChinaChina
48 more rows

Which business entity is the best? ›

Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.


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