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Legal Definitions of Business Entities

An important aspect of the U.S. legal system — from a business and economic standpoint — is that the law enables entities to be created for conducting business activities. These entities are separate and distinct from the individual owners of the business.

Business entities have many of the rights of individuals. Business entities can own property and enter into contracts, for example. In starting a business venture, one of the first things the founders have to do is select which type of legal structure to use — which usually requires the services of a lawyer who knows the laws of the state in which the business is organized.

A business may have just one owner, or two or more owners:

  • A one-owner business may choose to operate as a sole proprietorship

  • A multi-owner business must choose to be one of the following:

    • A corporation

    • A partnership

    • A limited liability company (LLC)

The most common type of business is a corporation (although the number of sole proprietorships would be larger if you count part-time, self-employed persons in this category).

No legal structure is inherently better than another; which one is right for a particular business is something that the business’s managers and owners need to decide at the time of starting the business. The advice of a lawyer is usually needed. The legal structure determines the income tax paid by the business and its owners, which is always an important consideration.

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