There are different types of business entity that engage in business activities, charitable work, or other activities allowable by law. Most often, business entities are formed to sell a product or service.
In this post, you will learn different types of business entities that exist, the difference between each one, tips to choose the right entity for your new company, and important business terms you need to know.
In the United States, the most common business entities include corporations, cooperatives, partnerships, sole proprietorship, limited liability companies and other specifically permitted and labelled types of entities. Your company will fall under one of these entities when registering it.
Here are the 14 most common types of business entities in the United States and most developed countries:
- Sole proprietorship: A sole proprietorship, also known as a sole trader, is owned by one person and operates for his benefit. The owner operates the business alone and may hire employees. A sole proprietor has unlimited liability for all obligations incurred by the business, whether from operating costs or judgments against the business. All assets of the business belong to a sole proprietor, including, for example, a computer infrastructure, any inventory, manufacturing equipment, or retail fixtures, as well as any real property owned by the sole proprietor.
Sole proprietorship is best suited for small business owners who want to retain managerial control over their companies.
- Partnership: A partnership is a business owned by two or more people. In most forms of partnerships, eachpartner has unlimited liability for the debts incurred by the business. The three most prevalent types of for-profit partnerships are general partnerships, limited partnerships, and limited liability partnerships.
Partnership is ideal for people who want to have a company that does not have to pay income tax. In partnerships, each partner files the profits or losses of the business on his or her own personal income tax return.
- Corporation: The owners of a corporation have limited liability and the business has a separate legal personality from its owners. Corporations can be either government-owned or privately owned, and they can organize either for profit or as nonprofit organizations. A privately owned, for-profit corporation is owned by its shareholders, who elect a board of directors to direct the corporation and hire its managerial staff. A privately owned, for-profit corporation can be either privately held by a small group of individuals, or publicly held, with publicly traded shares listed on a stock exchange.
Corporations are best for large companies or business entities that need to raise large amounts of money. Among the advantages of incorporation of a company include limited liability, transferable shares, perpetual succession, separate property, the capacity to sue, flexibility and autonomy.
- Cooperative: Often referred to as a “co-op”, a cooperative is a limited-liability business that can organize as for-profit or not-for-profit. A cooperative differs from a corporation in that it has members, not shareholders, and they share decision-making authority. Cooperatives are typically classified as either consumer cooperatives or worker cooperatives. Cooperatives are fundamental to the ideology of economic democracy.
A cooperative is ideal for you if you are looking to obtain capital through Investors instead of investing your own funds. Other benefits of having cooperative entity include less taxation, funding opportunities, Low Cost of Operations and Limited Liability.
- Limited liability companies (LLC), limited liability partnerships, and other specific types of business organization protect their owners or shareholders from business failure by doing business under a separate legal entity with certain legal protections. In contrast, unincorporated businesses or persons working on their own are usually not as protected.
An LLC’s is best suited for many small businesses owners who are looking to take advantage of LLC tax benefits, management flexibility and minimal recordkeeping and reporting requirements.
- Franchises: A franchise is a system in which entrepreneurs purchase the rights to open and run a business from a larger corporation. Franchising in the United States is widespread and is a major economic powerhouse. One out of twelve retail businesses in the United States are franchised and 8 million people are employed in a franchised business.
Franchise can be a good choice for you If you want to own a business and have the resources to make it work but don’t want to start from scratch.A company limited by guarantee: Commonly used where companies are formed for non-commercial purposes, such as clubs or charities. The members guarantee the payment of certain (usually nominal) amounts if the company goes into insolvent liquidation, but otherwise, they have no economic rights in relation to the company. This type of company is common in England. A company limited by guarantee may be with or without having share capital.
Companies limited by guarantee are usually formed to render services to the public with no profit-making intention. So, a company limited by guarantee is best for you if you have or plan to open charities, clubs, sports associations, membership organizations, NGOs and other social enterprises.
- A company limited by shares: The most common form of the company used for business ventures. Specifically, a limited company is a “company in which the liability of each shareholder is limited to the amount individually invested” with corporations being “the most common example of a limited company.” This type of company is common in England and many English-speaking countries. A company limited by shares may be a publicly traded company or a privately held company
One of many advantages of having a private limited company is the fact the financial liability of shareholders is limited to their shares. Therefore, if a private limited company was in financial trouble and had to close, shareholders would not risk losing their personal assets.
- A company limited by guarantee with a share capital: A hybrid entity, usually used where the company is formed for non-commercial purposes, but the activities of the company are partly funded by investors who expect a return. This type of company may no longer be formed in the UK, although provisions still exist in law for them to exist.
A company limited by guarantee (CLG) is best for you if you are creating a corporation primarily (but not exclusively) for non-profit organisations that do not have any shares or shareholders.
- A limited liability company (LLC): “A company—statutorily authorized in certain states—that is characterized by limited liability, management by members or managers, and limitations on ownership transfer”, i.e., L.L.C. LLC structure has been called “hybrid” in that it “combines the characteristics of a corporation and of a partnership or sole proprietorship”. Like a corporation, it has limited liability for members of the company, and like a partnership, it has “flow-through taxation to the members” and must be “dissolved upon the death or bankruptcy of a member”
This form of business entity provides protection to the owners by limiting the owner’s personal liability. That is, debts owed by the business, and other claims on the business, including liens and lawsuits, are limited to the assets of the business itself.
- An unlimited company with or without a share capital: A hybrid entity, a company where the liability of members or shareholders for the debts (if any) of the company are not limited. The shareholders (or members) of this type of company have unlimited liability; each member is jointly and severally liable for the debts of the company in the event of its insolvent winding-up.
Among many advantages of becoming an unlimited company, include having a separate legal identity, allowing the company to take out contracts in its own name, rather than the names of the directors and shareholders.
Less common types of companies include:
- Companies formed by letters patent: Most corporations by letters patent are corporations sole and not companies as the term is commonly understood today.
- Charter corporations: Before the passing of modern companies legislation, these were the only types of companies. Now they are relatively rare, except for very old companies that still survive (of which there are still many, particularly many British banks), or modern societies that fulfill a quasi-regulatory function (for example, the Bank of England is a corporation formed by a modern charter).
- Statutory companies: Relatively rare today, certain companies have been formed by a private statute passed in the relevant jurisdiction.
Important Business Terms to Know
Note that “Ltd after the company’s name signifies limited company, and PLC (public limited company) indicates that its shares are widely held.”
In legal parlance, the owners of a company are normally referred to as the “members”.
In a company limited or unlimited by shares (formed or incorporated with a share capital), this will be the shareholders.
In a company limited by guarantee, this will be the guarantors. Some offshore jurisdictions have created special forms of offshore company in a bid to attract business for their jurisdictions. Examples include “segregated portfolio companies” and restricted purpose companies.
There are, however, many, many sub-categories of types of company that can be formed in various jurisdictions in the world.
A parent company is a company that owns enough voting stock in another firm to control management and operations by influencing or electing its board of directors; the second company being deemed as a subsidiary of the parent company. The definition of a parent company differs by jurisdiction, with the definition normally being defined by way of laws dealing with companies in that jurisdiction.
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