What is a Business Entity and How Does it Work

A business entity is an organization created to conduct business activities. Different types of entities have different tax implications and levels of liability for their owners.

When starting a business, you must choose a specific entity type. This is typically done by filing the necessary paperwork with your state government.

There are five main types of business entities to consider. Sole proprietorships and partnerships are unincorporated, while limited liability partnerships, corporations, and LLCs offer varying degrees of liability protection and tax advantages.

Definition and Example of Business Entities

Business entity categories determine the structure of a business and its tax and liability implications. These entities are established at the state level by filing documents with agencies like the secretary of state.

For example, a freelancer may choose to form an LLC to protect their personal assets in case of business liabilities. This is done by completing the required paperwork and paying a fee to the state.

How Business Entities Function

Choosing the right business entity is crucial for a new enterprise. The entity type impacts tax obligations and liability in the event of legal issues. Most structures offer some protection for personal assets.

Creating a new business entity involves filing paperwork with the state and paying any necessary fees. The best choice depends on the business's nature, ownership structure, and goals.

For tailored advice, it's recommended to consult with tax and legal professionals. Organizations like the U.S. Small Business Administration can also provide guidance on setting up a business.

Types of Business Entities

While there are several business entity options, the most common choices include corporations, partnerships, LLCs, sole proprietorships, and limited liability partnerships.

Sole proprietorships are ideal for single owners, while partnerships are suited for multiple owners. Limited partnerships and corporations offer additional liability protection, along with different tax considerations.