What are Different Types of Business Entities?

Choosing the type of business entity is a practical matter for every entrepreneur. The type of business entity determines ownership, liability, and taxation. It can also have implications for the future expansion of your operations. 

A knowledgeable business attorney may help you determine the proper structure for your business. At Nowlan Law, our attorneys combine legal and business acumen to help our clients through every phase of developing and growing their businesses. 

Choosing a Wisconsin Business Structure and Why It Matters 

When it comes time to choose the appropriate type of entity for your business, three key aspects to consider are ownership, liability, and taxation. 

• Ownership: Who will own the business, and how will ownership interests be represented? 

• Liability: Who will be responsible for any debts incurred by the business? 

• Taxation: How will the company’s profits be distributed and ultimately taxed? 

What type of entity will best serve your needs will depend heavily on the goods or services offered, ownership interests, overhead costs, profitability, debts, licenses, insurance, etc. Entrepreneurs and their attorneys need to understand how the business will operate and the potential liabilities to choose an appropriate entity. 

Sole Proprietorship 

If an individual performs business activities without registering a business with the proper State agencies, this is considered a sole proprietorship. In these situations, business assets and liabilities are combined with personal assets and liabilities. A sole proprietorship is generally unsuitable for high-risk businesses since the individual owner can be personally liable for any debts incurred due to their business operations. 

Summary: 

• Ownership: Individual 

• Liability: Unlimited liability 

• Taxation: Profits and losses are reported on personal tax returns, and individuals pay self-employment taxes 

Partnership 

Partnerships are typically the simplest structure for two or more people to form a business. These partnerships usually come in two flavors: limited partnership (LP) or limited liability partnership (LLP). 

• Limited Partnerships: In a limited partnership, one partner has unlimited liability while the other partner(s) have limited liability. This also usually means that the limited partner(s) have less control over the company than the general partner. 

 

Summary: 

• Ownership: General partner and limited partner(s) 

•  Liability: Shared, with the general partner having unlimited liability 

• Taxation: Profits and losses are reported on personal tax returns, and the general partner pays self-employment taxes   

 

• Limited Liability Partnerships: Limited liability partnerships give each partner limited liability for business debts. Moreover, partners may not be held liable for the bad acts of another partner. 

 

Summary: 

• Ownership: Two or more partners  

• Liability: Limited 

• Taxation: Profits and losses reported on personal tax returns 

Limited Liability Company 

An LLC is a popular choice for many businesses because it has fewer requirements than corporations but many of the same benefits. It protects the owners’ personal assets from business liability, but members may elect to be taxed as a partnership allowing  profits and losses from the LLC to pass through their personal tax returns, or as a Subchapter S corporation. Also, LLCs do not need an EIN unless the business has multiple owners or employees. 

Summary: 

• Ownership: Member-owned 

• Liability: Limited liability 

• Taxation: Option to file for taxation as a partnership or Subchapter S corporation 

Corporation 

A corporation is a type of business entity usually owned by shareholders and offers limited liability protection to those shareholders, with some exceptions. In most cases, ownership is determined by the purchase of stock in the company. The amount of stock also usually impacts the shareholder’s voting power. 

There are several different corporate structures with differing levels of liability protection and tax benefits, including the following: 

• C Corporations: A Subchapter C corp is what most people think of when they hear “corporation.” C corps are owned by shareholders, have the most significant personal liability protection, and file corporate income taxes. The lines between the business and its owners are often much clearer than with other types of entities. 

 

Summary: 

•  Ownership: Shareholders 

• Liability: Limited liability 

•  Taxation: Profits and losses reported on corporate tax return 

 

• S Corporations: A Subchapter S corp is owned by shareholders and has limited liability like a C corp. In Wisconsin, S corps are limited to 100 shareholders and are subject to stricter regulations related to ownership and management of the corporation. However, S Corps can be more tax advantageous in some situations because it allows profits and losses to be reported on personal tax returns, avoiding double taxation. 

 

Summary: 

• Ownership: Shareholders 

• Liability: Limited liability 

• Taxation: Profits and losses reported on personal tax returns 

 

• Benefit Corporations: Benefit corporations are for-profit businesses that provide goods and services to benefit communities and the environment. While very similar to C Corps, a benefit corporation is driven by both its mission to produce a public benefit on society and the environment and turning a profit. 

 

Summary: 

• Ownership: Shareholders 

• Liability: Limited liability 

• Taxation: Taxed as an S Corp or C Corp 

 

• Close Corporations: Close corporations are exempt from many of the formal rules of other corporations. This, however, means that there are limitations on the corporation’s operations. In Wisconsin, a close corporation can have a maximum of 50 shareholders and cannot publicly trade stock. 

 

Summary: 

• Ownership: Shareholders 

• Liability: Limited liability 

• Taxation: Taxed as an S Corp or C Corp 

 

• Non-stock Corporations: In Wisconsin nonprofit organizations are formed as non-stock corporations, created for the benefit of the public, usually through charity, education, religious, literary, or scientific work. They do not have an owner and may apply for tax-exempt status. As a matter of structure, nonprofits follow similar organizational rules as C corporations but must follow special rules regarding any profits earned. 

 

Summary: 

• Ownership: None 

• Liability: Limited liability 

• Taxation: Tax Exempt 

 

• Cooperatives: A co-op is a type of corporation operated for the benefit of its members or user-owners. Members can become part of the co-op by purchasing shares. The number of shares does not affect the members’ voting power, and liability is limited to the member’s investment (purchase of shares). A board of directors or officers typically runs the organization while members vote on the direction of the business. 

 

Summary: 

• Ownership: Members/Users 

• Liability: Limited liability 

• Taxation: Profits and losses reported on corporate tax return 

How Nowlan Law Can Help Launch Your Business 

At Nowlan Law, our skilled attorneys are proud to assist entrepreneurs on their journey to business ownership. We can help you determine the type of entity that is appropriate for your business and handle all of the paperwork 

Our services include: 

• Assistance with selecting a business entity type 

• Checking name availability 

• Drafting and filing Articles of Incorporation 

• Drafting and filing Bylaws 

• Registering the business 

• Drafting Shareholder Agreements 

• Issuing stock certificates 

• Filing annual reports and minutes 

• Regular compliance reviews 

• Business restructuring 

• Applying for 501(c)(3) tax-exempt status 

Whether you are just starting or have already begun operations, you can trust the local team at Nowlan Law to provide quality legal services. Contact us today to schedule a consultation with one of our knowledgeable business lawyers.