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Business entity: Why your business should be owned by one – Pros and Cons

June 23, 2020

Businesses owned by a business entity

Business entity meaning and why should your business be owned by a business entity

Business entity is a very important advantage for businesses particularly established ones.   
However, before we delve into the benefits of having your business owned by a business entity, let’s understand what business entity’s meaning is. 

Business entity’s meaning is referring to the type and structure of a business and not what the business does. Simply put, a it is an organisation that has been created by one or more individuals with the purpose to conduct business activities. Therefore business entities can engage in all kinds of trade or take part in similar activities. 

There are several types of business entities. However, you must analyse and choose the best type to own your business, if you want to make the most of it.

Business entity types, their meaning and should your business be owned by one

A vast majority of all business is owned by a business entity. This is because having your business owned by a business entity has its advantages. Moreover, the type of business activities you do, influence what would your most suitable type be. 

The types of business entities are sole proprietorships, corporations, partnerships, limited liability companies (LLC) and limited liability partnerships (LLP).

Sole proprietorship 

Although it is officially recognised as a business entity, a sole proprietorship is not a special business structure that needs to be registered to conduct business. Therefore, one becomes a sole proprietor automatically when they conduct business outside of any other business entities. 

Therefore, this is usually used by freelancers and other service professionals. 

 

  • The biggest advantage of sole proprietorship as a business entity is that it is super simple to manage. 
  • The biggest disadvantage of sole proprietorship is that you are personally responsible for all your business debts and liabilities. Moreover, having no real separation between yourself and your business affects your access to getting finances (loans).  Additionally it makes it harder to build business credit too.

What are partnerships in business

There are two types of business partnerships as business entities: general partnership and limited partnership. 

A general partnership is like a sole proprietorship except that there are two or more business owners/partners.
Moreover, partners are actively involved in the business and share both profits and losses. Also you don’t have to register a general partnership. However, a big disadvantage is that all partners are personally responsible for the financial obligations of the business.

Furthermore, a limited partnership is a registered business entity. Additionally, a limited partnership can have two types of partners. One is a general partner that assumes liability for the business. The other is a limited partner that only acts as an investor. Moreover a limited partner does not assume any personal liability for the business.

Corporations

Corporations are business entities specifically created to do business. It is a separate entity from the individuals and people are not personally liable for business debts. Therefore, business experts would advise to have your business owned by a business entity that is a corporation. Especially, if your business is well established.

Moreover, corporations are taxed and are solely responsible for their actions. This is their key benefit, to avoid personal liability. However, the main disadvantage of this business entity is that they require extensive record keeping.

Limited liability company

Limited liability companies are the most popular business entity nowadays. Therfore, most business owners would advise to have your business owned by a business entity that is LLC. Why?

Because they bring both the advantages of corporations and partnerships together. Moreover, in LLC’s the profits and losses are passed down to the owners without taxation. Additionally, the business owners are also protected from personal liability for the business.

Why should you have your business owned by a business entity

Assess your legal liability

Depending on the nature of your business, you must assess how important it is for yourself to be legally protected from liability. As we discussed the business entity meaning, now you must review your situation.  Consecutively you can choose and apply the best business entity for your case. Moreover, you should see if you can afford the risk of liability. However, if you cannot don’t choose sole proprietorship or partnership.

What are your tax implications

Each business situation is different, so are their goals and tax opportunities. As a savvy business owner you are constant looking to reduce your costs and that includes tax implications as well. Additionally, corporations are a business entity that has by far the most tax options available. Therefore, if minimising tax is your goal, review your tax situation carefully. Moreover, speak with a professional tax advisor and then choose your company structure.

Administration and formation costs

Business is all about doing maths and getting positive results. Before choosing a business entity to own your business, calculate all the costs and advantages. If the tax advantages are less than the costs of doing business as a corporation, then a corporation may not be the best choice for you. 

Maximise the flexibility of your business

Having your business owned by a business entity that is an LLC or a corporation offers you maximum flexibility for your business. Moreover, these two structures work independently of the business owners. Therefore difficult situations that may arise between the owners. This can be due to them not having the same goals or financial situation. However it will not affect the business as it is an entity that does not affect personal liability.

Know your future needs

Think about the business in the next 5 or 10 years. How do you envision it? Where would you want it to be? Therefore, consider all possible scenarios, even such as sell off or death of a business owner. Morever, in order to have your business survive through ages you must be prepared in advance.

Now it is possible to answer this question: Why is your business owned by a business entity?

Because depending on the type of business you’re doing and if you’re not a freelancer, then the benefits of having a business owned by a business entity far outweigh the disadvantages. 

The meaning of a business entity is exactly this, to give you advantages and a better way of conducting your business activities.

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