An important step that entrepreneurs must take when starting their business is choosing a business entity for their company. The type of business entity you choose depends on the benefits you need for your business. Most entrepreneurs of start-up businesses elect not to incorporate because it’s costly to form and maintain. Once an entrepreneur makes this decision to not incorporate, there are a wide array of choices available:
A sole proprietorship is not a legal entity where an individual engages in business without partners and without any organizational forethought. The individual will be personally liable for all of the debts of the business and may freely commingle business with personal finances. There are probably more than 20 million sole proprietorships in the United States.
If two or more entrepreneurs join together to operate a business, they have formed a general partnership. They need not file any document with the state to legitimize their undertaking. However, they will be jointly and severally liable for all debts of the business. This is a default rule, so the entrepreneurs can alter this agreement.
Limited Liability Partnership (LLP)
A limited liability partnership is a general partnership with an important modification: the partners are not personally liable for the debts and obligations of the business except to the extent they have agreed to be or bear personal fault. To obtain the advantages of limited liability, the partnership must file a document with the designated state office.
A limited partnership has two classes of partners: general and limited. General partners are personally liable for the debts of the business while limited partners are not liable for the debts of the business. For this legal entity, a document must be filed with a designated office in the state.
Limited Liability Limited Partnership (LLLP)
This legal entity is a limited partnership in which the general partners have limited liability, akin to the liability of a partner in an LLP. The partnership must file a document with a designated office in the state.
Limited Liability Company (LLC)
A limited liability company is the newest and most popular option for entrepreneurs. This is a legal entity that is separate from its owner, so the owner is not personally liable for the debts and obligations of the business except to the extent that they have agreed to be or bear personal fault. However, this entity does require a document to be filed with the state.