The type of business you want to start is the single-most crucial choice you need to make as you plan to open business, whether locally or abroad. Aligning your goals to your business type is an important initial step to eventual success, so understanding each business type is crucial. It will affect your legal liability, costs of formation, operational costs, and others.
There are generally 4 (four) main types of business organization: sole proprietorship, partnership, corporation, and Limited Liability Company, or LLC. We’ll give some explanation of each of these.
- Sole Proprietorship
Known as the simplest, most common form of business ownership. The sole proprietorship type is a business owned and run by an owner for their benefit. The business’ existence depends solely on the owner’s decisions. This means that if the owner dies, so does the business.
Advantages of a sole proprietorship
All profits are subject to the owner, and there is little regulation for proprietorships. Moreover, the owner has total flexibility when running the business. There are also very few requirements to open a business—often needing only a business license.
Disadvantages of a sole proprietorship
The owner will be 100% liable for business debts, and the equity is limited to the owner’s resources. Furthermore, the ownership of proprietorship is difficult to transfer, and there’s no clear distinction between personal and business income.
- Partnership
Partnerships come in two types: general or limited.
General partnerships entail both owners investing their money, labor, property, etc., to the business. Both are also 100% liable for business debts. All of these mean that if you invest a little into a general partnership, you will still be responsible for all the debt. General partnerships don’t need a formal agreement—partnerships can be verbal or implied between the business owners.
Limited partnerships need a formal agreement between the partners. They need to file a certificate of partnership. Limited partnerships let partners limit their liability for business debts based on the portion of ownership or investment.
Advantages of partnerships
The shared resources offer more capital for the business, and each partner shares the company’s profits. There’s also the benefit of flexibility and simple design of a proprietorship coupled with cheaper to establish model, whether formal or informal
Disadvantages of partnerships
Each partner will be 100% responsible for debts and losses, and if selling the business will be difficult as it will require finding a new partner. The partnership will also end when any partner chooses to end it.
- Corporation
For tax purposes, corporations are separate entities that are considered legal persons. This means that the profits created by a corporation are taxed as the “personal income” of the company. Any income dispersed to the shareholders as dividends or profits is also taxed as the owners’ income.
Advantages of a corporation
The owner’s liability to debts or losses is limited, while the profits and losses belong to the entire corporation. It’s also easier to transfer corporations to new owners. Moreover, personal assets cannot be seized to recompense business debts.
Disadvantages of a corporation
Corporate operations can be costly, as well as establishing a corporation. Starting a corporate business also requires intricate paperwork. With a couple of exceptions, corporate income is taxed twice.
- Limited Liability Company (LLC)
Like a limited partnership, an LLC offers owners limited liability while offering some of the income advantages of a partnership. The advantages of partnerships and corporations are merged in an LLC, lessening some of the disadvantages of each.
Advantages of an LLC
LCC type limits liability to the company owners for debts or losses and the profits of the LLC will be shared by the owners without double-taxation.
Disadvantages of an LLC
Certain state laws limit the ownership, plus the agreements can be comprehensive and complex. The start of an LLC has included high costs due to legal and filing fees
If you need more resources and financing, plan to open business account onlineand find information from a lender’s site or consult with their consultant for advice on the steps, requirements, and legalities you need.