What are the Different Types of Business Entities?

Choosing an entity has many legal and financial implications. The amount of taxes one needs to pay depends on the types of business entities they are selecting. By choosing a business entity one can get business loans and raise money from investors. And if someone sues the business, business entity structure will determine regarding the assets which can be collected.

There are different types of business entities such as sole proprietorship, one person company, partnership, limited liability partnership, private limited company, public limited company. There are advantages and disadvantages of every entity and your decision eventually depends on what is important to you at present and in the future as the business evolves.

Sole Proprietorship

A sole proprietorship is simple to form and gives complete control of the business. You are spontaneously considered to be a sole proprietorship if you do the business activities but do not register as any other type of business.

Sole proprietorships do not generate a separate business entity. This means the assets and liabilities of the business are not separate from personal assets and liabilities. You can be held liable personally for the obligations and debts of the business. Sole proprietors are still able to get the trade name. It can also be tough to raise the money because you cannot sell stock and banks are not favorable in lending to sole proprietorships.

Sole proprietorships are considered as a good choice for low-risk businesses and the owners who want to test their business idea before forming a major business.

One Person Company (OPC)

One person companyis a company which has only one person as a member. The main features of a One person company are, the person founding the OPC is subjected to limited liabilities and the OPC is taxed in the same way as any other company.

A One Person Company is easy to manage. An OPC is an incorporated entity and therefore has the perpetual succession. This makes easier for the owners while raising capital for the business.

One Person Company enjoys a corporate status in the society which helps in attracting a quality workforce. Limited liability protection to the directors and shareholders is one of the most desirable reasons why many people are interested in opting to incorporate a One person company. If the business is not in a position to meet its obligations or to pay its liabilities, the entrepreneur liability is limited to the range of the unpaid subscription money. Unlike a sole proprietorship, the person’s personal assets are not used to make the payments once the unpaid subscription total is met.

Partnership

Partnerships are one of the easiest structures for two or more individuals to own a business together. There are two kinds of partnerships i.e. limited partnerships and limited liability partnerships.

Limited partnerships basically have only one general partner with unlimited liability and all the other partners have limited liability. The partners with the limited liability also have control over the company which is limited and documented in a partnership agreement. Profits are generally passed through to personal tax returns and the general partner without limited liability should also pay the self-employment taxes.

Limited liability partnerships are the same as limited partnerships, but give the limited liability to every partner. An LLP protects each and every partner from the debts against the partnership, they won't be liable for the actions of other partners.

Partnerships are the best choice for businesses containing multiple owners, professional groups and groups who are interested in testing their business idea before forming a major business.

Limited Liability Partnership (LLP)

Limited liability partnership is a mixture of both partnership and corporation. It has the essence of both these forms. As suggested by the name partners have limited liability in the company which states that personal assets of the partners are not required for paying off the debts of the company. In recent times, it has become of the popular form of business as many new businesses are opting this.

There are many partners in the company and hence they are not liable for the misconduct of others. Everyone is responsible for their own acts. It is a distinct legal entity diverse from its owners. It can enter into a contract and obtain the property in its name.

Private Limited Company

A private limited company is a business entity which is held by the private owners. This type of business entity limits the liability of owners to their ownership stake and restricts the shareholders from trading shares publicly. A Private limited company can consist of minimum 2 members and maximum 200 members. Minimum share capital required by a private limited company is only 1 lakh.

The liability of every member or shareholder is limited. This means that if the company is in the loss, the shareholders of the company are responsible to sell their company shares to clear the liability or debts. The personal or individual assets of the members or shareholders are not at risk. Private limited companies need not issue a prospectus because the public is not invited for the subscription of the shares of the company.

The private limited company shares cannot be transferred or sold to anyone except other shareholders agree with the same. There public are not invited for the subscription of the shares at any cost. It is compulsory that Pvt. Ltd. should be mentioned at the end of a company name.

Public Limited Company

A public company is a company that has the authorization to issue the registered securities to the general public through an IPO (Initial Public Offering) and it is traded on one stock exchange market at least. A public company is not ratified to begin its business operations only on the grant of the incorporation certification. For the eligibility to run as a public company, it should obtain a trading certificate also.

Minimum seven members should be there in a company before going public. The liability of the public company is limited. No member or shareholder is individually liable for the debts or liabilities. The public limited company is a separate legal entity and every shareholder is a part of it.

A public company can raise its capital from the public by issuing shares through the stock markets. It also can raise the capital by issuing debentures and bonds that are not secured debts issued to a company on the basis of the monetary performance and integrity of the company.

Shares of a public limited company are purchased and traded in the market. They are freely transferred among the people and members trading on the stock markets. For a public limited company, issuing prospectus is compulsory because the public is invited for the subscription of the shares of the company.

Going public is costly and time taking process. Any company which goes public is selling a part of the ownership of the company to unknown people. It is always not possible to raise the capital that you require to operate a public company from the shares, so the company owners should always hold at least 51 percent of the ownership with them. But, once a private limited company goes public, managing the business will become more difficult.