There are many types of business structures, each with advantages and disadvantages. Some people do not know the difference between them. The most important thing when choosing a business structure is to consult with a business lawyer so that all the proper steps are taken to avoid any legal issues down the road. Here is a brief overview of some of the most common business structures you must choose from when starting a business.
Sole Proprietorship
A sole proprietorship is the simplest type of business structure. There is only one owner who has complete control over the business. The owner is personally liable for all debts and obligations of the business.
Advantages:
- Easy and inexpensive to set up
- Complete control over the business
- Less paperwork and regulations than other types of businesses
Disadvantages:
- Unlimited liability with the owner personally responsible for all debts and obligations of the business
- May have difficulty raising capital because banks are often reluctant to lend money to a sole proprietorship
- Can be difficult to sell or transfer ownership
Partnership
A partnership is a type of business structure in which two or more people operate a business together. Partners share responsibility for the company, and each partner has an equal say in decision-making. Partnerships can be either general partnerships or limited partnerships. In a general partnership, all partners are equally liable for the debts and obligations of the business. In a limited partnership, at least one general partner is responsible for the debts and obligations of the company, and one or more limited partners are only liable for the amount of money they have invested in the business.
Advantages:
- Easy to set up with no special paperwork required
- Partners can share the workload and make decisions together
- Partners can pool their money, skills, and other resources to start and grow the business
- Partnerships are not taxed on their profits since profits and losses are reported in the partners’ personal tax returns
- Flexible management structure with any number of partners
Disadvantages:
- Unlimited liability with all partners personally responsible for the debts and obligations of the business
- Possibility of conflict as partners may not always agree on decisions
- Possible difficulty ending the partnership if partners can’t agree on how to divide the business
- Partners must pay self-employment taxes on their share of the profits
- Partnerships must file a separate tax return for the company, and each partner must also file a personal tax return
Corporation
A corporation is a type of business structure that offers limited liability protection to its owners. It is a separate legal entity from its owners and has many of the same rights and responsibilities as an individual. A board of directors elected by the owners or shareholders decides on behalf of the corporation. It hires the officers who manage the corporation’s daily operations.
There are two types of corporations. C corporations are the most common type of corporation. They are taxed on their profits, and then shareholders are taxed again on their dividends.
S corporations are less common. They are not taxed on their profits, but shareholders are still taxed on their dividends. S corporations can only have 100 shareholders, and they must be U.S. citizens or resident aliens. They cannot engage in certain types of business activities, such as banking or insurance.
Advantages:
- Limited liability protection where shareholders are only liable for the amount of money they have invested in the corporation
- Allowed to sell shares to raise capital
- Can exist indefinitely, even if shareholders die or leave the business
Disadvantages:
- Corporations have a complex structure with multiple layers of management
- Corporations are subject to higher taxes than other types of businesses
Limited Liability Company (LLC)
A limited liability company (LLC) is a type of business structure that offers limited liability protection to its owners. LLCs are similar to corporations, but they have some key differences. LLCs are not taxed on their profits, and their owners are only liable for the amount of money they have invested in the business. LLCs can have any number of members, and they are not required to have a board of directors or officers.
Advantages:
- LLC owners are only liable for the amount of money they have invested in the business
- LLCs are not taxed on their profits since profits and losses are reported in the owners’ personal tax returns
- LLCs can have any number of members, and they are not required to have a board of directors or officers
Disadvantages:
- LLC owners must pay self-employment taxes on their share of the profits
- LLCs must file a separate tax return for the business, and each member must also file a personal tax return
The type of business structure you choose will depend on the size and complexity of your company. Partnerships are generally recommended for small businesses with a few partners. At the same time, LLCs or corporations may be more appropriate for larger companies that can afford the additional overhead costs involved in maintaining these forms of ownership. When choosing which form to register for, it’s important to carefully weigh all pros and cons before deciding how your company should operate legally.
