Types of Entity: Accounting for Small Business

Michael Broida, CPA of Heller, Broida & Eisenberg Accountancy Corp. (www.HBEAC.com), discusses the types of entity for accounting. Learn about these types of entities for your company.

  1. An individual owner defaults to a sole proprietorship
  2. A basic agreement is required to setup a partnership
  3. Limited partnerships protect individuals from outside creditors
  4. LLC has pass-through tax benefit of a partnership plus liability protection of a corp
  5. S-Corp has tax benefits of a partnership & liability limitations of a C-Corp
  6. C-Corp: a legal entity of its own

Choosing the type of entity that you’re going to operate under is dependent upon the type of business that you have, whether you’re starting out with partners or whether you’re starting out on your own. Generally, when you start out on your own, you’re going to start as sole proprietorship. It’s a simple form of operation, you don’t need any legal issue; there are no legal issues to deal.

When you have partners or when you bring in a partner, you want to have a partnership. Partnership basically needs an agreement, you’re going to need an attorney to set that partnership up. Under partnerships, there are Limited partnerships. Limited partnerships protect you from liability against outside creditors, so that only the assets of the partnership are at risk.

Underneath that or alongside that, you have limited liability companies which again provide you with liability protection. The partnership, limited partnership, general partnership, LLCs are all pass-through entities. All of the income or losses is passed through to the owners.

Another form of entity is a corporation. Corporation also limits your personal liability. There are two types of corporations: one is an S-Corporation, an S-Corporation operates in a similar fashion to the partnership, LLC, then you, whereby the income or losses pass through to the partner or in this case, the shareholder. There are pluses and minuses to this type of entity and, again, you need to talk to your attorney and accountant to determine, “Is this for you?”

The last type is a – which is called C-Corporation, which, most large companies operate under this type of entity and the reason for it is, is they can pay dividends, if ever you grow big enough, you want to go public and be on the New York Stock Exchange, you’re going to need to have a C-Corporation. There are certain tax advantages and, again, you’re goanna need to talk to your attorney and accountant to determine which has entity is best for you.