What are Business Entities?

Incorporating a small business as a business entity is important as an incorporated business receives liability protection for its personal assets, tax savings, and added credibility for the company.

What is a Business Entity?

Business entities are legal structures that allow businesses to conduct business. Incorporating as a business entity ensures the separation and protection of personal and professional assets.

Why are Business Entities Important?

Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. You'll need to choose a business structure before you register your business.

Consulting with business counsellors, attorneys, and accountants can prove helpful.

What are the Types of Entities?

Sole Proprietorship

A sole proprietorship is not a separate legal entity – it’s considered an extension of the owner, but you can operate under a trade name.

The business uses your individual tax code, and you don’t need to register as a business.

Sole proprietorship taxes are easy, because it is all treated as personal income, but this means the owner is also accountable for any financial difficulties. The owner’s personal assets can also be at risk if a claim is made against the business.

Partnership

Partnerships are the simplest structure for two or more people to own a business together, there are 3 types of partnerships that you should consider but all have the following in common:

• Two or more people share the risks, costs, and responsibilities of being in business
• A partner can be an individual or another business
• The profits and gains of the partnership are shared among the partners, unless otherwise agreed
• Each partner is responsible for paying tax on their share of the profits and gains, and for their National Insurance contributions
• Each partner must register for Self-Assessment with HM Revenue & Customs and complete an annual tax return
• A nominated partner must also send HMRC a partnership return
• Partners raise money for the business out of their own assets or with loans
• The partners themselves usually manage the business
• The partnership must keep records showing business income and expenses

Partnerships have no legal existence distinct from the partners themselves. If one of the partners resigns, dies, or goes bankrupt, the partnership must be dissolved - although the business can continue. This is a relatively simple and flexible way for two or more people to own and run a business together.

Ordinary partnerships also must be registered with HMRC for tax purposes. The nominated partner does this by registering the partnership for Self-Assessment.

Limited partnerships are made up of a mixture of ordinary partners and limited partners. Limited partnerships must register with Companies House but don't generally have to make an annual return or file accounts. HMRC will set up the partnership's tax records so there is no need to register with them.

A limited partner's liability is limited to the amount of money they have invested in the business and to any personal guarantees they have given to raise finance.

Limited liability partnerships (LLPs) must have at least two designated members. LLPs are taxed as partnerships, but have the benefits of being a corporate entity, and members have limited liability.

LLPs must register with Companies House, send Companies House an annual return and file accounts with Companies House. HMRC will set up the LLP's tax records so there is no need to register with them.

Limited liability company (LLC)

A limited liability company (LLC) prevents individuals from being liable for the company’s financial losses and debt liabilities. In the event of legal action or business failure, liability is assumed by the company rather than its constituent partners or shareholders.

Company accounts will be made public and become more complicated for a LLC, it may be worth hiring an accountant.

Corporation

A corporation (or C Corp) is a business structure in which owners are taxed separately from the entity. Shareholders are owners of the corporation, each having a fractional interest in the whole. A shareholder could own a single share of the company, or millions of shares. C corps raise funding through the sale of these shares.

A C Corp pays tax on its income just as an individual would pay tax on their yearly salary. Shareholders in a C Corp are legally distinct from the corporation itself, profits distributed to shareholders in the form of dividends or other distributions are taxed at shareholders’ personal rates called “double taxation.”

S Corps is a business structure available to private corporations, like LLCs or partnerships, that is not subject to corporate income tax. In an S Corp, profits pass through to the shareholders, who then pay taxes on those profits when filing their personal income taxes.

Limited liability companies can file an “S election,” which allows them to be taxed as an S corp. These LLCs still operate as LLC business entities, which means they do not have to appoint a board of directors or hold board meetings, but it also means that they cannot issue shares.

B Corp demonstrates that you value society and the environment as a business. This not only helps you with attracting more customers, recruitment and retaining staff, research shows it can also boost performance and help your businesses grow.

B Corp companies strive not only for profits, but for the betterment of the world around them. This includes their employees and their customers, as well as society at large and the environment – both locally and globally.

B Corps are transparent about their operating practices and are held to a high standard of legal accountability. Companies must be recertified every three years, and if they fail to meet the set criteria, they lose their B Corp status. Not only that, but the criteria are dynamic, making sure that B Corps are always moving with the times and are on the cutting edge of what “good” looks like in the current world.

Close Company

A close company is privately owned and controlled by five or fewer individuals. Most small companies and many family companies are close companies.

When it comes to corporation tax, many close companies can benefit from the starting rates or small businesses. But if it is a close investment company, you must pay the full amount of corporation tax regardless of your profit levels.

Non-profit corporation

A Not-for-profit corporation is a broad term for all independent organisations whose purpose is something other than to make private profit for directors, members, or shareholders. Many different types of organisations can be “not-for-profit”. It is not a legal structure in and of itself.

Some organisations receive income from grants and donations, while others generate all their own income by selling goods and services. Knowing how you will generate income is important when choosing a legal structure, because some types of structure are less likely to attract grants and donations.

Cooperative

A co-op is a business or organisation that’s owned and controlled by its members, to meet their shared needs. The members can be its customers, employees, residents, or suppliers, who have a say in how the co-op is run.

Although co-ops are nearly twice as likely to survive the first five years as other types of business, just not enough are being started now. This may be due to a lack of awareness and understanding of co-ops in communities and among entrepreneurs, workers, businesses, policymakers, and those who advise them.

Ultimately, there isn’t one type of business entity that works for all types of businesses. There is a lot to consider when selecting the type of entity that works for your business needs.

Paramount Formations are on hand to provide additional information and guidance for all your business needs. Contact us using our contact form or call our friendly expert team on 0800 0198 698.