One of the most important decisions you have to make when starting a business is choosing the right legal structure for your organization. This single factor can determine the personal liability you will face, your ability to raise money, and the way you will be paying your taxes among many other things. Business structures come in four main kinds: sole proprietorship, partnership, limited liability company, and corporations. In this article, we will examine each one of them in order to help you decide which one to choose.
Of the four business structures, the simplest and most common one is a sole proprietorship. Under this business structure, the owner has total control over his or her own business, as well as complete liability. Meaning to say, in the event that a sole proprietorship fails, owners can be held personally responsible for their business’ financial obligations and debt. Chron’s review of the different organizational structures in business mentioned that this type works best with home-based businesses, one-person consulting firms, and shop or retail businesses.
As the name implies, partnerships are business structures with two or more owners. According to Business News Daily, there are two types of partnerships: general and limited. In general partnerships, everything is shared equally. On the other hand, in limited partnerships, only one of the partners is responsible for overseeing operation while the other person (or all the others) only has to contribute in some way and receives part of the profit. This structure is common for those who establish a business with a family member, a friend, or a trusty business partner.
A Limited liability company (LLC) is a business structure that can be thought of as a combination of a sole proprietorship and a corporation. ZenBusiness outlines how an LLC is a legal structure where the owners are not personally responsible for the company’s debt or liabilities (like corporations) and are taxed through their individual tax returns only (like sole proprietorships). LLCs are becoming more and more popular due to the protection they can bring to the owners and the flexibility they can offer. Since LLCs are legally recognized as being their own entities, the owners will not be saddled with large financial burdens if their business fails, which could potentially lead to personal bankruptcy. LLCs are also considered flexible since owners are given the leeway to set their own percentage of ownership in the business.
The two main types of corporations are C and S. The US Small Business Administration defines C corporations as a business structure that offers the strongest protection to its owners, which is why it is the most expensive one to register as. Aside from adopting a number of corporate bylaws, holding regular directors’ meetings and issuing shares, shareholders will have a say in the company’s operational processes. One of the biggest advantages to registering as a C corporation is that shareholders are allowed to explore a variety of ways to raise capital such as stock selling. S corporations, on the other hand, are a special type of corporation designed to help entrepreneurs avoid double taxation, which is the typical drawback of regular C corporations. To be elected as an S Corp, your organization must first be a registered domestic corporation that has no foreign owners, less than 100 approved shareholders and only issues one class of stock.
Establishing a business is never an easy feat. As an aspiring entrepreneur finding the right business structure is only one of the many things you have to consider and do. To keep yourself updated with the latest business trends, consider checking out the blog entries under the category Business.