Choosing the Right Business Entity: A Comprehensive Guide

When starting a business, one of the most important decisions you will make is choosing the right business entity. Clients call our small business attorneys to ask “what type of business entity should I form for my business?” The answer to this question affects many aspects of your business, including your taxes, legal liabilities, and management structure. The right business entity can protect your personal assets and simplify your taxes, while the wrong choice can leave you vulnerable to lawsuits and other risks.

With so many options available, and lots of (mis)information on the internet, it can be overwhelming to decide which business entity is right for you. In this comprehensive guide and blog post, we will help you understand the different types of business entities and provide tips on how to choose the best one for your business.

Sole Proprietorship

A sole proprietorship is the simplest and most common form of business entity. As the sole owner, you have complete control over the business and all its profits and losses. However, you are personally liable for all debts and legal liabilities of the business, which means your personal assets are at risk.

At Lopes Law, we generally advise clients to avoid doing business as a sole proprietorship. The liability risks are too high because sole proprietorships do not provide any legal separation between the business and the owner. As a sole proprietor, the owner and the business are essentially the same entity, which means that the owner is personally liable for all of the business's debts and obligations. This means that if the business is sued or incurs debts that it can't pay, the owner's personal assets, such as their home or personal savings, can be at risk. This lack of legal separation also makes it difficult to raise capital or secure loans, as banks and investors are often hesitant to lend money to sole proprietors without collateral or a track record of business success.

Additionally, sole proprietors are typically subject to a higher self-employment tax rate than other business entities, which can result in a higher overall tax burden. By choosing to operate as a different type of business entity, such as an LLC, corporation, or partnership, individuals can limit their personal liability, improve their ability to raise capital, and potentially reduce their tax burden.

If you have additional questions about sole proprietorships, consult with a small business attorney at Lopes Law, to determine the best business entity for your specific situation and goals.

Partnership

A partnership is a business owned by two or more people who share in the profits and losses of the business. Partnerships can take two forms: general partnerships and limited partnerships.

General Partnerships

In a general partnership, all partners share equally in the management of the business and are jointly and severally liable for the business's debts and legal liabilities. This means that each partner is responsible for the full amount of the partnership's obligations, regardless of their individual contribution to the business. In other words, if the partnership is sued or cannot pay its debts, each partner can be held personally liable for the full amount.

Limited Partnerships

In contrast, in a limited partnership, there are one or more general partners who manage the business and are personally liable for the business's debts and legal liabilities, and one or more limited partners who contribute capital but have limited liability. Limited partners are typically passive investors who do not participate in the management of the business and are only liable for the amount of their investment in the partnership. This means that their personal assets are generally protected from the partnership's creditors.

Partnerships are governed by partnership agreements, which set forth the rights and responsibilities of each partner, as well as the terms and conditions of the partnership. Partnerships are also subject to state laws, which vary by state.

One of the advantages of a partnership is that it is relatively