Businesses operate as organizations of individuals.

To effectively organize ownership and operations, businesses operated as formally-recognized entities.

What are Business Entities?

Business entities are legal organizations that exist by virtue of state law.

One way to view a business entity is as a separate person. The business entity carries on business activity on its own behalf.

The owners of the business entity are representatives of the entity.

Business entities benefit society by allowing individuals to aggregate their resources and efforts in furtherance of a business activity.

The legal entity is essentially a bundle of contracts that provides for the rights and duties of the owners and employees of the business entity.

Each individual state passes its own substantive and procedural laws regarding business entities. A business must choose its state of formation or organization.

The home state may be the location where the business is headquartered or it may be any other state where the business organizes and establishes a registered agent.

If the business wishes to carry on business outside of its home state, it must qualify to do business and register as a foreign entity doing business in the other state.

What are the main characteristics of a particular business entity?

There are numerous characteristics that make a business entity unique. The major characteristics of a business entity are as follows:

• Creation & Maintenance – The effort associated with forming and maintaining the entity;
• Continuity – The continuity or stability of the organization upon given occurrences;
• Ownership & Control – The ownership rights and control of those involved with the business;
• Personal Liability – The potential for the personal liability of those involved with the business;
• Compensation – The compensation and division of profits among business owners; and
• Taxation – The taxation of the organization’s earnings and its distributions of profits to the owners.

This list is certainly not exhaustive; however, these primary characteristics provide a great deal of necessary insight for understanding and choosing a business entity.

What are the main types of business entities?

The main types of business entity discussed in this chapter are:

• Sole Proprietorships – The sole proprietorship is not considered a separate business entity, but it is the basis from which business entities are defined.
• General Partnerships – The general partnership is the most basic type of business entity. While the general partnership is commonly understood to be a legal business entity, some legal theorists do not regard the partnership as a formal legal entity.
• Limited Partnerships – This is a hybrid form of partnership that allows for a class of partner known as a limited partner.
• Limited Liability Limited Partnership – This is a hybrid form of partnership that allows professional practitioners to organize as partners with limited personal liability.
• Limited Liability Companies – This is the most common form of business entity in the United States. The reason for this fact is based upon the blend of informal and protective characteristics of the LLC.
• Corporations – The corporations is the oldest form of business entity. The corporation is generally divided based upon its tax status as C-Corporation, S-Corporation, and non-profit Corporation.

Some of the less-common types of business entity are the limited liability limited partnership (LLLP) and the professional corporation (PC). The LLLP is a special purpose entity generally used as part of special project, such as a real estate project.

We discuss the intricacies of the various business entity types in the Business Law Courses.