ContractsCounsel Logo
Home Types of Contracts Business Entity

Business Entity

Jump to Section

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

Steven S.

16 projects on CC
CC verified
View Profile

Damien B.

16 projects on CC
CC verified
View Profile

Leonid G.

4 projects on CC
CC verified
View Profile

Kelvin R.

24 projects on CC
CC verified
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 may not need to register depending on 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 (including another business) 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, is a legal entity that can make a profit and be held legally liable. 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 depending on the type of corporation, may at times taxed twice - from the profits and dividends. They are a good choice for businesses with medium to high risk.

There are two main types of corporations: C corporations and S corporations. C corporations have their income taxed separately from their shareholders, and therefore face double taxation. S corporations instead have their income taxed directly as part of their shareholders’ income, although they are subject to additional restrictions on their ownership. Some states tax S corporations separately in the same way as C corporations, but most states and the federal government give them this pass-through tax status.

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.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

Need help registering a business?

Create a free project posting
Clients Rate Lawyers 4.9 Stars
based on 11,053 reviews

Meet some of our Business Entity Lawyers

Nicholas M. on ContractsCounsel
View Nicholas
5.0 (33)
Member Since:
June 1, 2023

Nicholas M.

Free Consultation
Providence, Rhode Island
14 Yrs Experience
Licensed in CT, MA, NC, RI
The Catholic University of America, Columbus School of Law

Nicholas Matlach is a cybersecurity expert (CISSP) and an attorney who is dedicated to helping small businesses succeed. He is a client-focused professional who has a deep understanding of the challenges that small businesses face in the digital age. He also provides legal counsel to small businesses on a variety of issues, including formation, intellectual property, contracts, and employment law.

Jeremiah C. on ContractsCounsel
View Jeremiah
5.0 (47)
Member Since:
March 5, 2021

Jeremiah C.

Partner/Attorney at Law
Free Consultation
16 Yrs Experience
Licensed in NV, TX
Thomas Jefferson

Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.

Edward R. on ContractsCounsel
View Edward
5.0 (1)
Member Since:
August 20, 2023

Edward R.

Free Consultation
San Diego, CA
21 Yrs Experience
Licensed in CA
University of San Diego

I have been a California since 2003 when I graduated from the University of San Diego School of Law and have worked in-house and at several major law firms before starting my own practice. I specialize in intellectual property and other business-related issues and have helped many entrepreneurs grow their ideas into profitable businesses.

Thomas B. on ContractsCounsel
View Thomas
Member Since:
July 2, 2023

Thomas B.

Free Consultation
34 Yrs Experience
Licensed in IN
Indiana University

Accomplished Attorney with 33 years of experience assisting clients with their legal needs, including reviewing and drafting of various contracts and agreements.

George K. on ContractsCounsel
View George
Member Since:
July 2, 2023

George K.

Owner & Managing Partner
Free Consultation
Denver, No. CO, Steamboat Springs
26 Yrs Experience
Licensed in CO
Whittier School of Law

I've represented small, medium, and Fortune 500 companies in business and litigation matters over the past twenty years. Working for various clients exposed me to a wide range of practice areas and issues. I now manage and own my firm. Contract review and drafting, negotiating agreements and settlements, and defending a variety of lawsuits is the heart of my practice. I'm efficient, solution driven, and work well with clients, other parties, and opposing counsel. I was awarded the American Jurisprudence Award in Advanced Legal Writing and am an excellent writer. I'm also the recipient of the Outstanding Young Lawyer Award and the ABA Military Pro Bono Project Outstanding Services Award. I'm a Marine Corps veteran. My attitude, experience, and expertise will help you achieve your goals.

Eleanor W. on ContractsCounsel
View Eleanor
Member Since:
July 3, 2023

Eleanor W.

Free Consultation
Bellevue, WA
12 Yrs Experience
Licensed in WA
Seattle University School of Law

I have been working as a document review attorney since 2011. I have also done some business and estate planning work. I am fluent in English, Chinese, French, and Japanese.

zurick s. on ContractsCounsel
View zurick
Member Since:
July 5, 2023

zurick s.

Attorney & Principal
Free Consultation
Washington, D.C., DC, United States
18 Yrs Experience
Licensed in DC
Texas Southern University at Thurgood Marshall School of Law

Zurick T. Smith is the founding member of The Law Office of Zurick T. Smith, PLLC. His firm services DC residents with Trusts & Estate Planning, simple to complex employment and business matters as well as business formations.

Find the best lawyer for your project

Browse Lawyers Now


Business Entity


Asked on Mar 25, 2022

How much does an Operating Agreement and Ownership Certificate cost

I’m forming a Nonprofit LLC

Mathew K.

Answered Apr 19, 2022

It depends on your circumstances. For example, single member LLC's are simpler and more affordable. Try posting your question as a proposal at this link so attorneys can bid on it:

Read 1 attorney answer>


Business Entity


Asked on Dec 15, 2021

What are memphis llc fees

Was buy home but he past and son put his name on a quick clam deed. What can I do need help

Jane C.

Answered Jan 21, 2022

The Tennessee Secretary of State website has a business division with business start up guides. I suggest you review that website

Read 1 attorney answer>


Business Entity


Asked on Jan 22, 2022

I wonder if it would be beneficial and/or necessary for me to becoming an LLC?

I am a part time face painter in Arizona. I have about 10-20 events a year. I estimate that I will make 3-5K per year.

Jane C.

Answered Feb 4, 2022

I suggest you consult with an experienced business attorney.

Read 1 attorney answer>

Small Business

Business Entity


Asked on Mar 17, 2022

I have an LLC for rental investment. Can i use the LLC to do independent corp to corp work.

Currently employed, with investment property under LLC. Would like to do independent contract work.

T. Phillip B.

Answered Mar 25, 2022

The question isn't whether you can do it, but is whether you SHOULD do it. You definitely would be able to do other work within the LLC. However, in doing so, now you active work and passive income are getting combined which would likely subject your passive income to the 15.3% self employment tax. Let me know if you have any questions on how to structure the businesses.

Read 1 attorney answer>
See more legal questions…

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

View Trustpilot Review

Need help registering a business?

Create a free project posting
Clients Rate Lawyers 4.9 Stars
based on 11,053 reviews
Corporate lawyers by top cities
See All Corporate Lawyers
Business Entity lawyers by city
See All Business Entity Lawyers

Contracts Counsel was incredibly helpful and easy to use. I submitted a project for a lawyer's help within a day I had received over 6 proposals from qualified lawyers. I submitted a bid that works best for my business and we went forward with the project.

View Trustpilot Review

I never knew how difficult it was to obtain representation or a lawyer, and ContractsCounsel was EXACTLY the type of service I was hoping for when I was in a pinch. Working with their service was efficient, effective and made me feel in control. Thank you so much and should I ever need attorney services down the road, I'll certainly be a repeat customer.

View Trustpilot Review

I got 5 bids within 24h of posting my project. I choose the person who provided the most detailed and relevant intro letter, highlighting their experience relevant to my project. I am very satisfied with the outcome and quality of the two agreements that were produced, they actually far exceed my expectations.

View Trustpilot Review

Need help registering a business?

Create a free project posting
Clients Rate Lawyers 4.9 Stars
based on 11,053 reviews

Want to speak to someone?

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

Request a call

Find lawyers and attorneys by city