What Types Of Business Entities Are There?

It’s rare for the average Joe to know what a Business Entity Search is without having it explained to them, but once they do, they usually retain it. The same concept that’s true in our relationships with the opposite sex and society at large applies to our dealings with other businesses: we all want to work with somebody we trust. A Business Entity Search helps you to find whether a certain company has potential for fraud or not, by checking their details in state and local databases. Further, it helps you locate whether the business has shut down or is still functioning.

Categorizing Entities

There are many forms and types of business entities, and the all fit in the following broad categories:

Sole proprietorship – This is a type of business entity where there is only one sole owner and there is no legal difference between the owner and the business. This is probably the simplest entity – the owner does all the work, he gets all the credit, he takes all the profits, he absorbs all the losses, and if there’s any legal liability – you guessed it, he’s all on his own. On the positive side, a sole proprietorship comes with the least amount of paperwork, and you can use your business expenses as a tax deduction. On the downside – If you get in debt and default, the creditor can dig into your personal assets for recovery.

Partnership – this is a legal entity which has more than one owner bound in a contract. The profits and losses are shared according to terms stated in that contract, but they have unlimited liability i.e. their personal assets can be targeted in case of default. This type of entity has the advantage of having larger capital than sole proprietorship, as more than one owner is involved. But it comes with disadvantages – partnerships can fail, and people can be unpredictable. I’ve seen more than one business partnership fall apart because a partner got too fond of billing things “to the business” and drove his partner to the poorhouse.

Private limited companies – this is the first type of legal business entity with limited liability, i.e. the personal assets of the owners cannot be used in case the business goes bankrupt. It requires fairly large amounts of capital, and the business ownership is divided among a group of private shareholders. The shares are generally sold within the company, and hence the decision-making (and the money) is not to be made public. These entities are treated as an individual separate from the people involved in the day-to-day operations.

Public Limited Companies – this is the largest type of business entity in terms of capital. The capital comes from public shareholding, as the Public limited company needs to be registered with a stock exchange. They have unlimited liability and usually the ownership is separate from management. They are required to show their financial statements, shareholder meetings, and performance publicly once a year at least, hence decision-making is not private. Failure to keep up those standards could get a corporation stripped of its personhood – an ugly experience for everyone involved.

Each business entity has its own rules and regulations. Why’s that important to a prospective searcher? Well, when an investor is ready to open her checkbook, she can check the viability of her investment according to the legal form of business. After all, all business entities, either having limited or unlimited liability, need to be registered with their state.

Once you’re know what kind of business entity you’re dealing with, it becomes a lot easier to get information from other databases.