Business Entity Types

There are many different types of legal entity structures and each has its own rights and privileges. From a business and taxation perspective, each business entity type has specific advantages and disadvantages. The most common businesses are structured as one of the following types of legal entity:

To manage credit risk, a credit union should identify:

  • All parties to a lending transaction, including their legal name, registration status (in good standing or not, with the state), type of entity, and structure
  • The ownership and structure of a borrower’s underlying business(es)
  • Individuals authorized to execute legally binding documents and agreements
  • The process for determining the legal status and existence of the entity
  • Entity documents to be obtained to verify the legal name of the borrower, and
  • Risk associated with the entity type, which may include cash-flows, liability exposure, tax treatment, and management and control of the entity

A borrower’s entity type determines how a credit union should style loan and collateral documents. Common questions a credit union may use to identify a borrower include “Who owns the assets?” and “Who generates the cash flow?”

The owners’ or principals’ personal liability for business debts and obligations varies based on how a business is legally structured (for example, LLC versus limited partnership). For those entities where the owners or principals are not directly liable, a credit union should require the personal guarantee of the principals that have a controlling interest in the business unless there are strong mitigating factors that offset the additional risk (§ 723.5(b)). See the personal guarantee section of the Examiner’s Guide for more information.

A credit union that provides financing to different business entities should understand how each structure works, as well as the process and documentation required to establish an enforceable obligation.

Last updated November 25, 2016