So, you’ve worked on your crowdfunding and you’ve registered a trademark. What’s next? Well, ideally you’d have decided on this before, but every entrepreneur needs to decide what kind of entity he/she best fits the business structure. Now, there are different kinds of entities: sole proprietorships, LLCs, LLPs, S-corporations, C-corporations, and LPs. This alphabet soup of entities each stands for a different type of organization that changes the liability, and tax benefits or burdens that can be available. What is there to choose from? What are the benefits and burdens with each choice? How would someone choose which entity to form?
What kinds of entities are there to choose from?
Entities are best divided up into three major groups: (i) sole proprietorships; (ii) partnerships; and (iii) corporations. The major differences tend to be in terms of liability and how they are taxed. Sole proprietorships and partnerships tend to be taxed to the individual, with liability being imposed on those individuals who are directly responsible for the business operations. However, this can be changed in part through types of partnerships like LPs, LLP, and LLLPs. These are “Limited Partnerships,” “Limited Liability Partnerships,” and “Limited Liability Limited Partnerships.” These partnerships are formed according to state law, with LLLPs currently not allowed under California law, but if formed in another state, they must be registered with the California Secretary of State prior to doing business in the state. Among the three, they generally function by having general and limited partners. In Limited Partnerships, there are at least two general partners with unlimited liability, and a limited partner who is only liable for what he/she had put into the company. Limited Liability Partnerships are similar, but unlike a general partnership, or a limited partnership, one would be isolated from the wrongdoings of their partners. LLCs can be used as a sort of partnership, as well, but can elect to be taxed as a corporation instead, with a tax through the company, and then to the owners.