Different Types of Business Entities

A business is defined simply as a business or corporate entity organized for the purpose of conducting commercial, industrial, or other economic activities. Businesses may be either for-profit or non-profitable entities that engage to meet a social objective or further an ethical purpose. In business, a company’s primary resources are capital and labor. Capital funds raised from loans or assets, while labor is direct human power exerted in the performance of business operations. Both are needed to make the business function properly.

Every business not only employs people, but also produces and consumes raw materials, fuels, and natural products. Corporations are legal bodies established for the benefit of the business owners. They can issue shares of stock for the issuance of dividends and can issue debentures for the payment of debts. The values of these things are determined by the value of the corporation’s assets, liabilities, and ownership structure. A business can be made up of a single entity or many entities working together for a common purpose.

A corporation is a separate legal entity from its shareholders. The same way that a married couple is separate from each other’s personal assets and liabilities, a corporation is separated from its stockholders. A corporation is organized to limit the liability of its directors and officers. However, this feature of a corporation is also one of its distinguishing features, making it a preferable choice for business owners.

For-Profit Corporations The only people who are directly responsible for a business’s activities are the corporation’s owners or shareholders. Because for-profit corporations are legally separate legal entities, their owners and shareholders are individually liable for the business’s debts and profits. These shareholders or owners are generally personally liable for the losses and debts of the business, even if they are not named on the articles of incorporation. This means that for profit corporations are not required to separate themselves from their stockholders.

Limited Liability Company One of the most common types of business entities is a limited liability company. This business entity is different from a corporation because it has no centralized management and control. A limited liability business entity allows business owners to manage their businesses themselves. As a result, this form of business entity allows business owners to retain complete control over their businesses even when they are no longer involved in the business. In other words, a limited liability company provides business owners with much of the control and independence that they would otherwise lose if they were still involved in the business.

Sole Proprietorship Many businesses at times choose to operate as a sole proprietorship instead of as a corporation. For some businesses, the decision to operate as a sole proprietorship is made in order to simplify business operations. While operating as a sole proprietorship does have its advantages, there are also many disadvantages. One of the major disadvantages of operating your business as a sole proprietorship is that you will not be able to shield yourself from lawsuits.

Partnerships Another popular type of business structure includes partnership. A partnership occurs when two or more people get involved in a business agreement. Some common partnership arrangements include limited liability partnerships and general partnerships. Partnerships are most commonly found among small, start-up businesses.

Similar to limited liability partnerships and sole proprietorship are general partnerships. In general partnerships, one business partner plays the role of a general partner and another business partner plays the role of a partner. Some common general partnerships include stock partnerships, property partnerships, rent-to-own agreements, and business acquisitions. A shareholder will generally only receive dividends from a partnership business. However, in some cases, the general partnership may have an additional clause which allows partners to share in the business income or losses.

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