Practical Application: Business Entity Classification Infographic

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

When starting a business, few decisions are more important than the organization's legal structure. Significant personal financial and legal consequences can result from making a poor choice.

Choosing the Right Structure

When an entrepreneur is interested in starting a new business, one of the most important decisions that he or she will make is that of the legal and tax structure under which they will incorporate. As described in the lesson Classification and Legal Protection of Business Entities, each options carries a unique combination of protections, benefits, and risks for the new owner(s).

Common Classification Options

Incorporating as a sole proprietor is appealing because it has minimal ''red tape'' to own and operate. There is substantial risk for a sole proprietorship because personal and business assets are not separated. This means that proprietor's (the exclusive owner of the proprietorship) assets can be used to satisfy business debts or judgement.

In a partnership, the same benefits and risks apply with one exception: any individual partner can be held liable for business debts.

Unlike a sole proprietorship or partnership, incorporating as a corporation provides legal protection for the personal assets of shareholders. The two major types of corporations are the S-Crop and the C-Corp.

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