Choosing the right business organization is the most critical decision regarding your company. So you must know the pros and cons of each type to ensure that you are choosing the right type for your business. You also need to align your goals with each type. And then analyze which type would be more suitable for your business entity. Because it will have an effect on how you will be taxed, the formation cost, legal liability, and other operating costs of your business. In this article, we’ll discuss the main 4 business types.
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- Sole Proprietorship
- Limited Liability Company
We‘ll discuss one by one each. If you have any queries or anything to share then don’t forget to comment in the comments section reserved just for you.
4 Business Types You Must Know
Sole Proprietorship-Business Types
A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.Investopedia
As its name suggests, the sole means one and hence it is a kind of business that has one owner. In this type of business, the sole owner makes all the decisions of the business. And business existent is correlated with the sole proprietor. In case if the owner dies then his business also comes to an end.
- All profits are owned by the owner. So he does not need to share the profit with partners etc.
- There are no such legal requirements for a sole proprietorship
- The sole owner can run the business according to his desires and he is flexible about the decisions, time, etc.
- Just need a business license to start such business
- The sole owner has unlimited liability which means that in case of bankruptcy his personal assets can also be sold out
- Limited capital
- No division of work as in Partnership
- No difference between personal income and business income
“A partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities. In a general partnership company, all members share both profits and liabilities. Professionals like doctors and lawyers often form a limited liability partnership.”Investopedia
In the case of a partnership, you can enjoy a larger capital. Profits as well as losses are also shared in this form. Business decisions are made with mutual consultation. It has further two types. One is called a general partnership while the other is known as a limited partnership.
Both partners have to invest in and both are fully liable for the business debts. Suppose that you have invested less in this partnership kind but still, you will be equally responsible in case of occurrence of losses, etc. For this kind of partnership, there is no requirement for a formal agreement.
It requires formal agreement. The filing of a certificate of partnership is also necessary. The liability is limited to the extent of the portion invested by the partner.
Advantages of partnerships:
- There is larger capital because of more partners
- Profit-sharing between the partners according to the agreement
- Mutual Consultation and a variety of ideas
- Divison of work is possible
Disadvantages of Partnership:
- Each partner is fully responsible in case of occurring losses and debts
- If any partner decides to end the partnership then it will come to an end
“A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a “legal person.”Investopedia
A corporation is considered a legal person. And it has a separate legal entity. That means if the corporation generates profits then it will be taxed as the personal income of the company. And when the income is distributed to its shareholders in the form of profit or dividend then it will be taxed as the personal income of the owners.
- In case of losses or debts, the owner has limited liability.
- A corporation holds both profits as well as losses
- In the case of business debts, the personal assets of the owners cannot be seized
- Transferring to a new owner is very easy
- To operate a corporation there is a need for huge finances
- Establishing cost is also high
- To start a corporate business there is way more complex paperwork than other kinds of business types.
Limited Liability Company (LLC)-Business Types
A limited liability company (LLC) is a business structure in the United States whereby the owners are not personally liable for the company’s debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.Investopedia
It is quite similar to a limited partnership. It merges together the advantages of partnership and corporations. Whilesome disadvantages of each are also included in the limited liability company.
Advantages of an LLC:
- In case of bankruptcy or losses company owners have limited liability
- No double taxation as it was in the corporation
- Formation of the agreement is very complex
- High legal fees that’s why it is difficult to form such business
Do you need any help while deciding that out of these business types which business type would be good for you? Please without any further delay reach out to us!
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