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Are You Thinking of Starting a Business? Here is What You Should Know

Business Structures

Business

Are You Thinking Of Starting A Business? Here Is What You Should Know

There are three types of business structures. You can choose between a Sole proprietorship, partnerships, and LLC (Limited Liability Company). Each has its advantages and disadvantages in complexity, liability protection, operating complexity, taxation, periodic reporting requirements, cost and ease of set up.

Choosing a business form that’s a perfect fit for you can be difficult and requires a lot of considerations. For you to run a successful business, you must learn how to choose, plan, and organize the business form that best suits you. Read on to learn more about each business structure:

Sole proprietorship

This is the most common form of business anybody can start. Basically, you are the business. It’s easy and inexpensive to set up. A sole proprietorship is not a legal entity, and all you need to do is register your business name, get a local license, and you are good to go. You get to enjoy the profits and take all the losses all by yourself. Most sole proprietorships expand and become complex businesses.

One distinct disadvantage, however, is that you are personally liable for all the business debts. If you run into some financial difficulty, creditors can file a lawsuit against you, and if they succeed, you will have to pay up with your money and assets.

Partnerships

It is an association of two or more people who decide to start up and run a business as co-owners to pursue profits. Setting up a partnership is easy and inexpensive. They also offer their members the flexibility in operations. In limited liability partnerships; partners enjoy some degree of liability protection. Profits and losses are also shared among members.

It is, however, important to note that partnerships crumple and end up in legal battles because most of them operate without any legal written agreement. Don’t engage in any form of business without a written contract. Partners are also responsible for the wrong decisions made by one partner and shoulder all the liability of their corporation.

LLC (Limited Liability Company)

A limited liability company is a legal person. It has rights and obligations. It can do business and must conform to the state laws and requirements. This business structure was invented to shield investors from the risk of further liability should their ventures fail.

One positive aspect of LLC is that members are not responsible for the debts incurred in the course of running the business. In case creditors sue the company, the personal assets of its members cannot be used to pay off the debts. Unlike partnerships or sole proprietorships, LLC member can only pay the business debts if he guaranteed the debt, if the company does not pay taxes or violates state laws or if their funds intermingled with company money.

Since it’s a legal entity, starting up this form of business can be a tedious process. Unlike the other forms of business, you will have to file a certificate of formation and pay filling charges. Setting up an LLC is expensive, and members should be careful not to mix up personal money with business funds.

Bottom line: When choosing a business structure, it is essential to take note of the cost of setting up and expenses of running a particular form of business, the varied liabilities, income tax and the investment needs of each structure. These criteria will help guide your decision into choosing a business form that is a perfect fit for you.

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