There are many people that dream of starting their own business and becoming their own boss but often people don’t know where to start. One of the first things that needs to be done when starting a business is choosing a business structure that will be best suited to your needs. There are a variety of business structures which ultimately will have tax and legal implications so it is important to choose the correct structure when starting out. Continue reading to learn more about the different business structures.
A sole proprietorship is the most common business structure chosen when creating a new business and is also considered the simplest. A sole proprietorship is a business that is unincorporated and is run and owned by one specific person, with no distinction between the business and owner. This means that the owner of the business is entitled to all profits but is also responsible for any business debt, liabilities, and losses. Setting up a sole proprietorship does not require any specific action. As long as a person is the only owner of a business, they are automatically considered a sole proprietorship.
Corporations are also at times referred to as C corporations. A corporation is an independent, legal entity that is owned by a group of shareholders. In a situation where a business is a corporation, the corporation itself as opposed to the shareholders are legally liable for any debts and actions that the business incurs. Corporations are much more complex than other types of business structures. They also tend to have complex legal and tax requirements and costly legal fees. Because of the complexities and costs of a corporation, they are generally only recommended for larger companies that are already established and have multiple employees.
Limited Liability Company
A limited liability company or LLC is essentially a hybrid legal structure that combines the features of a corporation and a partnership. A limited liability company includes the tax efficiency of a partnership along with the limited liability features of corporations. In an LLC, the owners of the company are referred to as members but unlike corporate shareholders, LLCs do not get taxed as a separate business entity. Both profits and losses are passed on from the business to each member or owner of the LLC.
A partnership is a type of business in which two or more people share ownership. Each partner in a partnership contributes to all business aspects including labor, money, and property, and each partner also shares in profits and losses. When creating a partnership, it is important to work out details beforehand as there will be more than one person involved in decision making processes. A legal partnership agreement will ensure that all business decisions are made as discussed. There are three general types of partnerships including general, limited, and joint. General partnerships are ones in which everything is divided equally among partners. Limited partnerships allow for certain partners to have limited liability and input on business decisions. Joint partnerships are similar to general partnerships but only last for a limited period of time, for example, the length of time it takes to complete a certain project.
An S corporation is a specific type of corporation that is created through a tax election with the IRS. There are only certain circumstances under which an S corporation can be created. A business must first create a corporation before even considering setting up an S corporation. Essentially when an S corporation is created, financial liabilities for the owners or shareholders are limited. The biggest difference between a corporation and an S corporation is that with an S corporation, profits and losses can pass through personal tax returns and the business itself is not taxed.
A cooperative is a type of organization or business that is operated for the benefit of and owned by the people using its service. With a cooperative, any profits and earnings that are generated are distributed evenly among the user-owners. Often with a cooperative, a board of directors and officers is elected to run the organization while members have the power to direct the cooperative through voting.
Choosing the best business structure depends on a lot of different factors and is just one of the many decisions to be made when starting a business. Whether you have a degree such as an MBA or not, if you are willing to put in the hard work and plan properly, you can have a successful business. Learn more by consulting the resources listed below.
- Choose Your Business Structure
- IRS – Business Structures Overview
- Types of Business Structures
- Choosing the Right Business Structure
- Defining a Business – Business Structures
- Steps to Starting a Business
- Business Basics and Types
- Compare Business Structures
- Business Structure Comparison
- Choosing the Best Business Structure