Business Entity

Clients Rate Lawyers on our Platform 4.9/5 Stars
based on 4,784 reviews

Jump to Section

Need help with a Business Entity?

Post Project Now

What is a Business Entity?

A business entity is an organization founded by one or more individuals to conduct a specific business or allow them to engage in a trade or similar activities. Business entities, also referred to as business structures, are formed at the state level by filing documents with a state agency like the Secretary of State.

The four major business entity types include sole proprietorship, partnership, limited liability company (LLC), and corporation. The entities are expected to comply with the state laws by filing specific documents and paying any obligatory fees to set up the business legally.

Your choice of business entity will determine the organization's structure and, in turn, the documents you will need to file, your ability to raise money , how liability is determined and how taxes are paid . The type of business you wish to engage in and the number of owners will highly determine the type of business entity you choose.

Four Types of Business Entities

There are many types of business entities recognized by the state. However, these four are the major ones that business owners choose from.

1. Sole Proprietorship

A sole proprietorship is undoubtedly the easiest business entity to set up and operate. When you launch a business and are the sole owner or the operator, you are a sole proprietor under the law. This entity doesn't require registration with the state, but you might be required to apply for local business permits and licenses, depending on your industry.

Example: Service professionals like consultants and freelancers are often sole proprietors. Established businesses like retail stores with one person at the helm can also be sole proprietorships.

Pros for Sole Proprietorships:

  • The business is easy to start as you don’t need any state registration.
  • Corporate formalities and paperwork requirements are not necessary when setting up.
  • With this type of structure, tax filing is easy. You don't separate your tax as either business or personal; you only file one tax.
  • You can deduct most of your business losses from your personal tax return.

Cons for Sole Proprietorships:

  • You are personally liable for all business debts, which can put your personal assets at risk should your business be sued. (No limited liability protection).
  • It isn't easy to secure a business loan and raise money. Lenders and investors tend to prefer corporations and LLCs .
  • Building business credit and getting a business loan with an unregistered business entity is hard.
Meet some lawyers on our platform

Briana C.

63 projects on CC
View Profile

Faryal A.

6 projects on CC
View Profile

Elbert T.

3 projects on CC
View Profile

Ryenne S.

192 projects on CC
View Profile

2. Partnership

A partnership is an unincorporated business entity formed by two or more individuals. All partners agree to manage the business and share profits and losses. Partnerships come in two forms: general partnerships (GPs) and limited partnerships (LPs).

General Partnerships

A general partnership resembles a sole proprietorship closely, but for the fact that these have two or more owners. The business doesn't have an obligation to register with the state but might need to pay for business licenses and permits depending on their industry. In most states, a general partnership is formed by signing a partnership agreement by all members.

Advantages of partnership:

  • The business entity is easy to start and dissolve as you don’t need any state registration.
  • Owners can deduct most of their business losses from their personal tax returns.
  • Corporate formalities and paperwork requirements are not necessary when setting up.
  • All owners share in any profits and losses from the business.
  • Having several partners share in the start-up struggles can be very helpful.

Read more about the advantages of a partnership .

Disadvantages of a partnership:

  • Each one of the owners is personally liable for business debts and liabilities.
  • Building business credit and getting a business loan with an unregistered business entity is hard.
  • In some states, all partners are personally liable for each other's negligent actions ( joint and several liability ).
  • Each partner has independent power to loans and contracts binding the business.
  • Disputes amongst the owners/partners can derail the business.
  • Partnership dissolves automatically if a partner dies.

Limited Partnership

A limited partnership (LP) is a form of a registered business entity. Of the partners, only one partner has complete responsibility and general liability for the business. The others only provide money and don't actively manage the business.

The LP files returns that report the business’ income, gains, losses, and deductions. However, they don't file income tax. Profits and losses made by the LP business are passed to the business partners, with the silent partners only sharing in the profits and not the losses or liability.

Pros of a limited partnership:

  • A good option for raising money as investors can join the partnership without personal liability.
  • The general partner still maintains control over their business even after getting funding from limited partners.
  • Limited partners can withdraw from the partnership without dissolving the business.

Cons of a limited partnership:

  • General partners solely bear all business debts and liabilities.
  • Setting up an LP business requires a state filing, making it more expensive to set up than a GP.
  • Any limited partner of an LP who takes an active role in business risks facing personal liability.

Examples: Red Bull & GoPro, Apple & MasterCard, Airbnb & Flipboard.

Other forms of partnerships operate as legal entities fully registered with the state and with limited liability protection shielding the partners' assets. The debate on general partner vs. limited partner centers on personal responsibility and liability for business losses and liabilities. These partnerships also include the limited liability partnership (LLP) and limited liability limited partnership (LLLP).

Here is an article that explores more about partnerships.

ContractsCounsel Business Entity Image

Image via Pexels by fauxels

3. Limited Liability Company (LLC)

A limited liability company take the positive features of other businesses with liability protection. The owners of a limited liability company are only responsible for its debts up to the extent of their invested capital. That is to say, the structure of an LLC protects its owners from any personal responsibility for liabilities and debts incurred by the LLC.

Legally, a limited liability company is an entity separate from its owners. It can be owned by one individual or many people ( multi-member LLC ), making it a valuable alternative for individual business owners. All LLCs should have a business plan and an LLC operating agreement that sets out the financial details and working relations between the owners and the managers.

Examples: Pepsi-Cola, Blackberry, Nike.

Pros of a limited liability company:

  • LLC owners have no personal liability for the business's liabilities and debts.
  • You have the option to choose if your LLC gets taxed as a corporation or partnership to avoid double taxation.
  • LLC has fewer corporate formalities than B corp , C corp , and S corp .
  • LLC have no ownership restrictions; owners can range from 1 number to whichever maximum.
  • Active members of an LLC can deduct operating any operating losses against a member’s regular income

Cons of a limited liability company:

  • An LLC with partners who are also employees with fringe benefits like medical insurance, parking, and group insurance must treat them as taxable income
  • Profits from an LLC are subject to medicare and social security taxes, meaning the owners might end up paying more taxes compared to owners of a corporation.
  • LLC’s require registration with the state to conduct business, making them more expensive to create than partnerships or sole proprietorships.

LLCs must also have articles of organization , which is basically a founders’ agreement or internal regulations that bind and guide the operations and interactions. You will also need to agree on having a member-managed LLC vs. a manager-managed LLC .

Here is an article with more on LLCs.

4. Corporation

A corporation is a popular type of legal business entity where owners are protected by limited liability. Its charter restricts its name and scope of activities. A corporation, also referred to as a C corp, is a legal entity that can make a profit, be held legally liable, and be taxed too. Stakeholders who are also employees can take advantage of certain tax-free benefits like health insurance.

Corporations cost more to set up compared to other business structures. They also require extensive operational processes, bookkeeping, reporting, and tax compliance. Corporations pay income tax on their profits and are at times taxed twice - from the profits and dividends. They are a good choice for businesses with medium to high risk.

Examples: Microsoft, Apple Inc., Walmart Inc. are all corporations.

Pros of a corporation:

  • Owners/ shareholders have no personal liability to liabilities and debts of the business.
  • Corporations can raise money by offering stock.
  • C corporations are subject to more tax deductions than other business structures, with their owners paying lower self-employment taxes.

Cons of a corporation:

  • C corporations are more expensive to create compared to partnerships and sole proprietorships.
  • They face double taxation by taking corporate tax returns and still having shareholders pay taxes on their dividends.
  • Has too many formalities like holding shareholder and board meetings, creating bylaws, and keeping minutes of all meetings.

Other types of corporations like S corp and B corp, also governed by corporate bylaws . When setting up, there must first be a shareholders' agreement.

There is more on Corporations in this article.

How to Create a Business Entity

  1. Sole proprietorship: Write a business plan, obtain a DBA certificate if operating under a name that isn’t your own, and you are set to start operating.
  2. Partnership: Operates more or less like a sole proprietorship, so follow the process above. The only extra document is a partnership agreement.
  3. LLC: Write a business plan, file documents with the state, create an operating agreement, operate your business.
  4. Corporation: Choose the business name, determine the initial directors, file documents with the state, draft corporate bylaws and adopt them in a board meeting, issue shares.

Get Help with Forming a Business Entity

Do you need help forming a business entity? Post a project in ContractsCounsel’s marketplace to get free flat fee bids from lawyers to review and compare. All lawyers on our platform are vetted by our team and peer reviewed by our customers for you to explore before hiring.

How ContractsCounsel Works
Hiring a lawyer on ContractsCounsel is easy, transparent and affordable.
1. Post a Free Project
Complete our 4-step process to provide info on what you need done.
2. Get Bids to Review
Receive flat-fee bids from lawyers in our marketplace to compare.
3. Start Your Project
Securely pay to start working with the lawyer you select.

Meet some of our Business Entity Lawyers

Jonathan K. on ContractsCounsel
View Jonathan
5.0 (1)
Member Since:
October 15, 2022

Jonathan K.

Managing Attorney
Free Consultation
Tulsa, OK
17 Yrs Experience
Licensed in OK
Oklahoma City University School of Law

Jonathan is the Founder and Managing Attorney of Liberty Legal Solutions, LLC, a law firm dedicated to building, protecting, and defending the business and personal interests of our clients in Oklahoma. Jonathan's primary practice areas are business law, contracts and agreements, business litigation including breach of contract disputes and commercial claims, and outside general counsel services. Jonathan is considered an "America First" attorney by several of his clients, and has a reputation for aggressively defending their interests and rights both inside and outside the courtroom. Prior to founding Liberty Legal Solutions, LLC, Jonathan worked with a civil litigation law firm in Edmond, Oklahoma, where he obtained experience in a variety of practice areas. Jonathan has also worked with regional creditor rights law firms where he has assisted them in starting their branch operations in Oklahoma. Jonathan earned his B.A. in Government & International Politics from George Mason University in 2002 and earned his Juris Doctor from Oklahoma City University in 2006. Jonathan is married to his wife Jennifer. When not helping clients, Jonathan enjoys reading, Republican politics, spending time with family, traveling, and working on his "Freedom Friday" blog.

Adalbert M. on ContractsCounsel
View Adalbert
5.0 (2)
Member Since:
October 26, 2022

Adalbert M.

Free Consultation
Port Saint Lucie, FL
2 Yrs Experience
Licensed in FL
Western Michigan University Thomas M. Cooley Law School

I am a solo-practitioner and founder of The CYA LAW FIRM, PLLC, in Port Saint Lucie, Florida. I am a transactional lawyer, focusing on Asset Protection, Estate Planning, and Business Law. I am fluent in Spanish and English.

Karl D. S. on ContractsCounsel
View Karl D.
5.0 (1)
Member Since:
October 28, 2022

Karl D. S.

Free Consultation
Middlebury, Connecticut
11 Yrs Experience
Licensed in CT, MA
Pepperdine University School of Law

Karl D. Shehu, has a multidisciplinary practice encompassing small business law, estate and legacy planning, real estate law, and litigation. Attorney Shehu has assisted families, physicians, professionals, and people of faith provide for their loved ones by crafting individualized estate and legacy plans. Protecting families and safeguarding families is his passion. Attorney Shehu routinely represents lenders, buyers, sellers, and businesses in real estate transactions, researching and resolving title defects, escrowing funds, and drafting lending documents. To date, Attorney Shehu has closed a real estate deal in every town in Connecticut. As a litigator, Attorney Shehu has proven willing to engage in contentious court battles to obtain results for his clients. While practicing at DLA Piper, LLP, in Boston, Attorney Shehu represented the world’s largest pharmaceutical companies in multidistrict litigations filed throughout the United States. He has been a passionate advocate for immigrants and the seriously injured, frequently advising against lowball settlement offers. He is willing to try every case to verdict, and he meticulously prepares every case for trial. Attorney Shehu began his legal career as a consumer lawyer, utilizing fee-shifting statutes to force unscrupulous businesses to pay the legal fees of aggrieved consumers. For example, in Access Therapies v. Mendoza, 1:13-cv-01317 (S.D. Ind. 2014), Attorney Shehu utilized unique interpretations of the Trafficking Victims Protection Act, Truth-in-Lending Act, and Racketeer Influenced and Corrupt Organizations Act (RICO) to obtain a favorable result for his immigrant client. Attorney Shehu is a Waterbury, Connecticut native. He attended Our Lady of Mount Carmel grammar school, The Loomis Chaffee School, and Chase Collegiate School before earning degrees from Boston College, the University of Oxford’s Said Business School in England, and Pepperdine University School of Law. At Oxford, Karl was voted president of his class. Outside of his law practice, Attorney Shehu has worked to improve the world around him by participating in numerous charitable endeavors. He is a former candidate for the Connecticut Senate and a parishioner of St. Patrick Parish and Oratory in Waterbury. In addition, Attorney Shehu has written extensively on the Twenty-fifth Amendment and law firm retention by multinational firms.

Danny J. on ContractsCounsel
View Danny
Member Since:
October 17, 2022

Danny J.

Free Consultation
New York, NY
9 Yrs Experience
Licensed in NY
New York Law School

I have had my own law practice since 2014 and I enjoy solving my clients’ problems. That’s why I constantly stay on top of the latest developments in the law and business of startups, entertainment, art, intellectual property, and commercial enterprise. I constantly keep learning because everything I learn helps me make my client’s life better. I assist clients in all aspects of copyright, trademark, contract, trade secret, business, nonprofit, employment, mediation, art, fashion, and entertainment law. Even though I am licensed to practice law in NY, I have worked for clients all over the country and even in Europe, Africa, and Latin America. No matter the client, I always look for ways to protect their assets, artworks, businesses, and brands with strategies to help them grow. I am a fluent bilingual legal professional who can analyze complex legal and business problems and solve them creatively for the benefit of my clients. I am detail-oriented and attentive which makes me excellent at negotiating, drafting, and revising all types of agreements and deals. I advise creatives and companies on intellectual property issues, risk management, and strategic planning. My clients love what I do for them because I employ a practical, client-tailored, and results-oriented approach to their case, no matter how small.

CRAIG C. on ContractsCounsel
Member Since:
October 19, 2022


Free Consultation
Fort Worth, TX
29 Yrs Experience
Licensed in TX

I have 27 years of experience with drafting, editing, revising, reviewing and amending business and commercial contracts and agreements of all kinds.

Kevin F. on ContractsCounsel
View Kevin
Member Since:
October 26, 2022

Kevin F.

Director, IP Lawyer
Free Consultation
Bournemouth, England
36 Yrs Experience
Licensed in MA
The George Washington University School of Law

I'm an IP lawyer and patent attorney (US and European). I work in high tech fields, such as software, quantum computing, AI and Blockchain and many other IT related fields. I've been in IBM's IP legal function for 25 years and now am a Director in my own law firm.

Cherryl M. on ContractsCounsel
View Cherryl
Member Since:
November 4, 2022

Cherryl M.

Contract Attorney
Free Consultation
London, GB
5 Yrs Experience
Licensed in CA
University of California, Hastings College of the Law

I am a U.S. lawyer (licensed in California) and have recently relocated to London. I hold a bachelor’s degree in Political Science from the University of California, Berkeley and a Juris Doctor law degree from the University of California, Hastings College of the Law. I have extensive experience in providing legal services and support in areas of business, labor & employment, IP enforcement (patent infringement, copyright & trademark), and other litigation matters; Reviewing, drafting, and editing business and legal documents/contracts; Conducting legal research and analysis, drafting memorandums, pleadings, discovery, document review, various motions, mediation briefs, and other litigation related activities; Reviewing and preparation of templates, policies, and processes for compliance with laws and regulations; educating and advising on legal and compliance issues.

Find the best lawyer for your project

Browse Lawyers Now

Want to speak to someone?

Get in touch below and we will schedule a time to connect!

Request a call