Types of Business Entities
- Sole Proprietorships - a business owned by only one individual and does not offer limited liability to the owner. A sole proprietorship is not considered a separate entity for tax or legal purposes. The owner of a sole proprietorship must file their business name with the Minnesota Secretary of State if the business name is different than the owner's name.
- General Partnerships - formed automatically when two or more persons engage in an activity for profit. The members of a general partnership are jointly and severally liable for the debts of the business. The only requirements courts look at when determining if a general partnership has been created are if they business owners activities are “continuous, considerable, and regular” and motivated for profit.
- Limited Liability Companies - a limited liability company (LLC) is a form of business organization that is designed to combine the tax treatment of a sole proprietorship or partnership with the limited liability characteristics of a corporation. A limited liability company may have one or more owners, who are called “members.” LLC’s can elect to be taxed as (1) a sole proprietorship, (2) a partnership, (3) a corporation, or (4) an S-Corp, as long as the LLC meets legal requirements and files the proper documents. Dentists, doctors, attorneys, pharmacists, engineers, accountants, architects, social workers, registered nurses and veterinarians often use an LLC as a vehicle to form a professional firm.
- Assumed Names - the purpose of an assumed name is to provide notice to the public of the true ownership interest of a business entity. If the business name does not convey the true ownership of the business, the owner is required to file a Certificate of Assumed Name with the Secretary of State.
- C- Corps - treated as a separate entity for federal and state tax purposes. It provides its owners with limited liability protections for tort and contract damages. A type C and type S corporation are filed and operate the same way, the main difference is how they are treated for tax purposes. The disadvantage of a C corporation is, that in some cases, the entity may face double taxation. The entity is taxed at the corporate tax rate, then the shareholders are taxed on the dividends from the corporation.
- S- Corps - formed and operated the same way as a C corporation, but is treated differently for tax purposes. In most cases, S corporation shareholders, rather than the corporation itself, are taxed on the profits of the corporation.
- Other entities - selecting the ideal form of business entity can achieve tax efficiencies for the business and help it for future growth. Choosing the best form of business entity requires not only understanding the different aspects of partnerships, LLC's, C corporations and S corporations, but more importantly, designing a structure to accomplish the owners' specific goals. Some goals may include maintaining control, raising capital, incentives to employees, and eventually providing for a smooth transition in ownership and management.
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