One of the basic things soon-to-be business owners have to grapple with is choosing the type of business they should form. For new start-up owners, the legal aspects around creating a business can be intimidating, causing many of them to give up the idea of starting. Fortunately, choosing the best business type for your venture is not that difficult.
Below is a list of the five most common types of businesses. The list should help you settle on the best structure depending on your current and future requirements.
The most popular business type is the sole proprietorship because it is the simplest to start and only requires a single individual. One person owns such a business, but there is no financial or legal difference between the owner and business. This means that the business owner is fully responsible for any profits, losses, liabilities, and even legal issues the business encounters.
A sole proprietorship business doesn’t require you to fill forms or go through legal procedures to declare it. Instead, as a sole proprietor, you are automatically associated with your new start-up. On the other hand, your business niche may require you to apply for specific licenses.
A partnership is appropriate for your business if two or more individuals run it. In this type of business, the legal and financial business responsibilities fall upon the business owners. However, you will be required to register the business with the state and get an official business name.
A limited partnership (LP) is a derivative of the general partnership where one partner (general partner) is involved in the daily business decisions and the limited partner is an investor who’s not liable for debts. Partnerships allow business owners to share their expertise and skills in running the business.
Partnerships also define how much profit a partner earns and are common structures with smaller ventures like franchises under 10k and the likes.
A corporation features a fully independent business venture with multiple shareholders who hold stock in the business. The most common is the C Corporation that allows businesses to deduct taxes like individuals – but your profits are taxed twice at the personal and corporate level. However, this shouldn’t hold you back since it is common and this is the best structure if you have multiple employees.
Limited Liability Company (LLC)
An LLC business structure is a combination of a partnership and corporation where instead of shareholders, LLC owners are known as members. No matter the number of members in an LLC, a single managing member is responsible for the everyday running of the business. Unlike a corporation, profits and losses are divided among the LLC members, who then report them on their personal federal tax returns.
LLC members are not personally liable for company actions or decisions, and less paperwork is involved in starting an LLC compared to the corporation. LLCs are most popular for online businesses since small groups of individuals can come together and create a company together.
This type of business is created and operated for the benefit of the members using its services. In short, cooperative earnings are shared among the members and not external stakeholders. However, such a business should have bylaws, membership application, and a board of directors.
As you choose your business’ structure, it’s critical you research local and state laws and ordinances as you may be required to fill forms depending on your business niche and location. The Small Business Association (SBA) is a great starting point for the research since they have local offices all over the country.