What Is a Business Entity Owner?

Potential owners should be aware of the following types of business entities and their ownership titles:

• Sole proprietorships (Owned by individuals called owners)

• Partnerships (Owned by two or more individuals, called partners)

• Corporations (Owned by one or more individuals or entities called shareholders)

• Limited liability companies (LLCs) (Owned by one or more individuals or entities called members)

These entity types control the business structure that impacts business tax treatment and personal liability for the business operations. They do not impact creative decisions like what your company sells or which industry it transacts in.

Business entity owners must decide how they want to be taxed and whether it makes sense to reduce personal risk.

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Key Takeaways

• Business entity owners are owners of legal business structures.

• Available business entities include sole proprietorships, partnerships, corporations, and limited liability companies.

• Entity forms guide the business’s overall structure, but not what the business does.

• Deciding on a business entity is often a matter of tax options and risk mitigation.

Understanding Business Entity Owners

Choosing the correct business entity often comes down to two critical issues for its owners: taxation and risk. The following business entity forms have advantages and disadvantages and how these are weighed by the owners depends on their needs and goals.

Here are the different forms of business entities that every new owner should know about before getting started:

• Sole proprietorships: Sole proprietorships are the default business entity in the United States. They are usually owned by an individual and are not registered with the state. Sole proprietorships are only taxed at the personal income level because they include the business net profits or losses on their personal income tax returns. Sole proprietors are personally responsible for all debts and obligations of a business. Therefore, an owner’s assets can be at risk.

• General partnerships: Like sole proprietorships, general partnerships are also unregistered business entities. They involve two or more people engaging in a for-profit venture. General partners manage the business and share in the profits or losses. Similar to sole proprietorships, there is no limited liability protection for an owner’s personal assets. It is wise for partners to draft a partnership agreement to outline the rights and responsibilities of the partners. General partnerships are different than limited partnerships and limited liability partnerships.

• Corporations: Corporations are separate legal entities from their owners. They usually have many owners, called shareholders. Registering a corporation in a state involves filing articles of incorporation. Corporations can choose how they want to be taxed. C corporations (C-corps) are taxed at the corporate level and again at the income level, called “double taxation”. Net profits of S corporations (S-corps) are taxed only at a personal level because they pass-through to the owners’ individual tax returns. The personal assets of owners are not liable for the business debts and obligations, the only risk is to business assets. Corporations must have a board of directors for oversight and have more formal record-keeping requirements.

• LLCs: LLC owners are called members. LLCs are easier to set up than corporations due to less formal requirements. LLCs are flexible in that they can elect C-corp or S-corp status with the IRS for a more favorable tax rate depending on the circumstances. LLCs also protect an owner’s personal assets in a manner that is similar to corporations. LLCs should create an operating agreement to outline who manages the LLC.

This chart compares the different entities with the corresponding ownership term, liability protection, and tax treatment.

Seeking Assistance

Every new business owner faces their own set of evolving characteristics and challenges. Choosing the right business entity, while rewarding, can be a complicated endeavor for many. It’s never a bad idea to contact a small business lawyer when just starting out.

Related Topics

• Sole Proprietorships
• Partnerships
• Corporations
• Tax Differences Between C and S Corporations
• LLCs