“Business entity” is a designation given to state-registered companies in the broadest sense. A company or corporation comes into existence as a business entity when it is registered and approved by a government. Governments create business entities when they approve and register companies. The companies created by governments represent several types of business entities. The several types of business entities include various sorts of companies and corporations.
What is a Business Entity?
Business entities are organizations formally recognized by governments as companies or corporations. Governments bring companies and corporations into existence through registration processes. The companies and corporations brought into existence by governments through processes of registration are referred to as “business entities”. “Business entity” is a broad term whose referents include all types of companies and corporations. All types of companies and corporations may be referred to as business entities.
What is the Importance of the Term Business Entity?
The importance of the term “business entity” is that it serves to designate all types of companies and corporations, regardless of type. Many kinds of companies and corporations exist. The existence of many kinds of companies and corporations necessitates a single term that refers to all of them, no matter what type of business entity they are. The use of the term business entity allows for all types of companies and corporations to be referred to without reference to what kind of company or corporation any given individual business entity is. The word “entity” also reminds us of the fact that companies and corporations are treated before the law as separate individuals distinct from the individuals who own and work for these companies and corporations.
How are Business Entities Created?
Business entities are created by governments. Governments use registration processes to create business entities. Business entities are granted legal personhood by the state after they complete the registration process. The registration processes used by governments to create business entities involve the filing of paperwork and the payment of fees. A company that files the appropriate paperwork and pays the fees specified by the appropriate government is eligible for recognition as a business entity.
What are the Types of Business Entities?
The following table lists the kinds of unincorporated business entities.
|Sole Proprietorship||General Partnership||Limited Partnership||Limited Liability Companies (LLC|
|Registered to a single individual||Registered to multiple co-owners||Registered to full owners and part owners (investors)||Fully registered as a distinct legal identity|
|Simple filing process, but affords little legal protection||Relatively simple filing process, more (but still limited) legal protection||Allows for easier fund-raising||More time-consuming and expensive registration, more complete legal protection|
1. Sole Proprietorship
Sole proprietorships are business entities that are registered to single individuals. Sole proprietorships are easy to establish and maintain. The ease with which sole proprietorships are established and maintained is offset by the lack of legal protection that they offer. The lack of legal protection that sole proprietorships offer is associated with difficulty in obtaining financing from banks and financiers. The difficulty in obtaining financing for sole proprietorships means that only quite small-scale businesses are generally organized as sole proprietorships.
2. General Partnership
General partnerships are one step ahead of sole proprietorships in terms of organizational complexity. General partnerships are business entities that are registered to two or more co-owners. The general partnership mode of organization affords somewhat more legal protection than does the sole proprietorship mode of organization. The somewhat greater legal protection afforded by general partnerships is associated with slightly greater ease in obtaining business financing. The slightly greater ease with which general partnerships can obtain business financing means that general partnerships can become somewhat larger than sole proprietorships.
3. Limited Partnership
The limited partnership is a mode of business organization that is similar to the general partnership mode of business organization. Limited partnerships and general partnerships differ in the status of the co-owners. Limited partnerships are registered both to full partners, who are like the owners of general partnerships, and to limited partners, who provide funding in exchange for part ownership. The limited partnership mode of business entity organizations makes raising money easier than is the case with general partnerships. The ease of raising money that limited partnerships provide in comparison to general partnerships comes from the fact that investors in the company are compensated with part ownership.
4. Limited Liability Companies (LLCs)
The limited liability company mode of business organization is a step up in organizational complexity from the general partnership. Limited liability companies have full recognition as distinct legal entities for all purposes. The benefits of the full legal recognition that limited liability companies have for all purposes consist of the legal and liability protections that the limited liability company mode of business organization affords to the owners of limited liability companies. The benefits provided by the limited liability company mode of business organization are offset by certain negative considerations. The negative considerations that attach themselves to the limited liability company mode of business organization include lengthy and expensive registration processes.
What is the Business Entity Concept?
The concept of the business entity is the idea that governments can create legal persons distinct from natural persons, i.e. human beings. The term “business entity” is used to refer to all of the different kinds of legal persons that governments create for business purposes. The reference of the term “business entity” to all of the different kinds of legal persons that governments create allows the term to be used to indicate any business company or corporation as a governmentally-recognized organization. The use of the term “business entity” does not require reference to what type of business organization any given governmentally-recognized business organization is. The concept of the business entity is a universal notion of the company or corporation recognized as such by a government.
How to choose a Business Entity Type?
The following list demonstrates how to choose the type of business entity that is right for you.
- First, estimate the size of your businesses.
- Second, determine the extent to which your business relies on financing.
- Then evaluate your company’s need for legal and liability protection.
- Finally, decide how much effort and expense you are willing to undertake to register your company with the government.
What is the Best Business Entity for Tax Purposes?
The limited liability company mode of business organization is the best business entity for tax purposes overall. The tax advantages of the different modes of business organization are to be preferred from one situation to the next. Smaller companies may benefit more from the lower levels of business organization. Larger companies may benefit more from the higher levels of business organization. Evaluate your company’s particular situation before choosing which business entity is best for tax purposes.
What is the Difference between a Business and an Entity?
The word “entity” has a very broad signification. “Entity” is derived from the Latin word ens, which is a conjugated form of the Latin word sum meaning “to be”. The broad signification of the word “entity” refers to anything that has a distinct being. The word “business” derives from the English word “busy”, in the sense of being occupied with some task. The difference between business and entity is the difference between being and doing. A business entity is recognized as “being” a separate thing on the basis that it is “occupied” with some work.