An Introduction to Business Entities



A business entity is simple the form in which you business is held. Some entities provide protection against personal liability for business debts while others are tailored to provide flexibility and tax savings. As time has passed, the different types of entities have increased as government entities at the state level have come up with unique solutions. While the idea of a corporate is very old, most people do not recognize that a limited liability company has existed as an entity for less than 30 years.

Ironically, businesses that take no step to create a business have done so unwittingly. If you are the single owner of a business, you are legally known as a sole proprietor. Your business is naked in legal terms, to wit, it provides you with no protection against debts or liability. In practical terms, if you get sued for faulty products or one of your employees has an auto accident, you are personally liable for any resulting damages.

When two or more people start a business, they are often surprised to learn that they are considered a general partnership in the eyes of the law. Much like a sole proprietorship for a single owner, this is an automatic default situation. From a personal point of view, a general partnership is one of the worst entities to use for a business. Under well-established law, each partner is jointly and severally liable for the debts of the partnership. In human terms, this means every partner is liable for every debt of the partnership. If one of your partners has drinks with a client and then kills someone on the drive home while legally drunk, you are liable for his actions. All and all, general partnerships should be avoided like the plague.

A more popular business entity these days is the limited liability company, often known as the “LLC.” This entity has existed for less than 20 years, but is quickly catching up to corporations in popularity. In the late 1970s, the first LLC legislation was passed in Wyoming. The state was looking to create a flexible business entity in a niche between a corporation and a partnership. Frankly, the state was also looking to generate revenue from fees. Boy, did it. The LLC proved so popular that practically all states now have legislation providing for its use by small business.

The last major business entity is also the best known – the corporation. When push comes to shove, this is the big daddy of entities. It has existed for hundreds of years and comes in two forms – an “S” or “C” corporation. An S corporation is designed for smaller business and provides more tax relief than the traditional C corporation. The C on the other hand is the ultimate beast and the primary formed used by huge companies that trade shares on the various stock exchanges. The advantage of either of these corporations has to do with their protective elements. Specifically, the use of a corporation creates a shield of protection between business debts and your personal assets. In the case of the drunk driving partner, you would not be exposed to any personal liability for the relevant judgment.

This is only a brief introduction to business entities. There are also hybrids of the aforementioned entities. The bigger point, however, is to make sure you considering an entity that will protect you from the ravages of personal liability should the business be sued or fail.