3 Types of Business Entities (Definition and Explanation)


Before looking into the detail of the types of business entities, we would like to introduce the definition of business.

Business is the trading activities of one person, a group of persons, commodities, and organizations in which the purpose of those activities is for generating profit directly or indirectly.

Business is whatever size or nature of activities that could generate profit or return on what they invested directly or indirectly.

The business could be formed in commercial or industry commercial transactions to supply goods or services.

The business ranges from a minimal entity consisting of a few members to a huge one that has a hundred thousand staff like Facebook and Google.

And the meaning of profit is the excess of income over the expenses for the period. The following is the list of types of business entities. The list contains four types of business, including Sole Traders,

1) Sole Trader:

Sole Traders or sole trader-ship are the types of business entities that own, run, and managed by mainly one person. Mostly, sole trader-ship employs few employees and does have not many business transactions.

Accounting records for the sole traders’ business are also not much complicated as the others. This kind of business is normally formed by the entrepreneur and get many exceptions for legal and tax purpose.

The sole trader cannot legally separate its debt from the entity once the business goes into liquidation. Personnel assets might be used to compensate for the liabilities.

Some advantages of sole traders are fewer legal requirements, probably got many tax exceptions, the owner control business and assets directly, and it is very flexible.

Related article  Why is Accounting Considered and Called the Language of Business?

2) Limited Liabilities Companies:

Most of the big companies or corporations are registered under limited liabilities companies. Legally limited liabilities companies, the personnel assets of the shareholder or the owners of the companies are legally separate from the entity or company.

This type of company normally has a complicated management structure as well as a board of directors, many legal documents are required.

The shareholders of this type of entity are normally the companies as well as the individual. Different legal jurisdictions may differently require legal documents.

3) Partnership:

As its name, these types of business entities are formed by at least two partners to carry the business. The business partners normally have expertise in a specific skill or know-how.

Some disadvantage of these types of business entities in every one of the partners owe the liabilities of others. Normally, this type of business got many conflicts. To form a partnership, the member is normally done by partnership agreements.

Advantages of partnerships include:

  • Less stringent reporting obligations – no requirement to make financial accounts publicly available, no audit requirement, unless the partnership has LLP status.
  • Additional capital can be raised because more people are investing in the business.
  • Division of roles and responsibilities and an increased skillset.
  • Sharing of risk and losses between more people.
  • No company tax on the business (profits are distributed to partners and then subject to personal tax).