A business entity is a legal structure formed under state law to offer a product or service. The type of business structure you use dictates how taxes are paid and the relationship between the owners of the business. When beginning a new business in North Carolina, choosing a legal structure is one of the first decisions you’ll make.
Why is a business entity important?
A business entity protects you, personally, from business liabilities and debts. For example, it would protect personal assets like your car, house, and personal bank accounts from company debts. Additionally, a business entity formalizes your relationship with business partners and dictates how you’re taxed federally and by the state.
What types of business entities exist?
There are many types of business entities recognized in North Carolina. They are:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Company
What are the pros and cons of each of these types of entities?
A Sole Proprietor is basically the lack of a business entity; it is owned/operated by one person. There are no liability protections so a small business owner would be personally responsible for all liabilities and debts incurred. There are no pros to a sole proprietorship.
A General Partnership is also the lack of a business entity, but in this case, the business is owned and operated by two or more persons. Again, there are no pros to having this type of business entity. The persons that own the business are personally responsible for all liabilities and debts.
A Limited Partnership is a business entity registered with the state and owned/operated by two or more persons who are either general partners (actively manage the company), or limited partners (have no management responsibilities or authority, just invest). Limited Partners are protected from company debts that exceed their investment. General Partners, however, are personally responsible for all liabilities and debts.
An S-Corporation is a business entity registered with the state and owned by one or more persons with “shares.” Under an S-Corporation, there is no personal liability for company debt, and the corporation doesn’t pay taxes, only you, the business owner, needs to. With this type of entity, business owners should be prepared for “red tape.” This comes in the form of a board of directors, officers, annual minutes, and one class of shares.
A C-Corporation is a business entity registered with the state and owned by one or more persons with “shares.” Under a C-Corporation, there is no personal liability for company debts, the corporation doesn’t pay taxes, and there are several classes of shares allowed to raise funds.
Like an S-Corporation, business owners of a C-Corporation will be faced with “red tape.” This includes a board of directors, officers, and annual minutes. Plus, there is double taxation, where business profits are taxed at both the corporate and personal level.
A Limited Liability Company (LLC) is a business entity registered with the secretary of state and owned by one or more persons with membership interest units. There is no personal liability for company debts, no red tape, and no other “cons” to this type of business entity.