The way you structure your businesses can have an effect on many aspects of your business. Everything from daily operations to taxes and how much of your personal assets are at risk is affected by the business structure you choose. You should choose a business structure that provides the appropriate balance of legal safeguards and benefits. It could be that you need some legal protections or the possibility to pass on your business in the future.Here are some of the most common ways you can structure your business:
Sole Proprietorship
A sole proprietorship is simple to establish and gives you complete control over your business. It is called a sole proprietorship because it is owned by a single person. The person owns all the assets and liabilities of the business. If you conduct business but do not register as any other type of business, you are automatically considered a sole proprietorship. When running a sole proprietorship, you don't have a business entity. So you can be held personally liable for the debts and obligations of the business. It's hard to raise money because you can't sell stock of the business. And banks are a little hesitant to lend to sole proprietorships. Sole proprietorships are perfect for low-risk businesses. If you want to test your business idea you can form a sole proprietorship, and then later convert it to a corporation if you want.
Partnerships: General Partnership & Limited Partnership
In order to establish a partnership all parties involved will need to be in agreement. You will not need to file with your state for permission. In a General Partnership there can be an unlimited number of general partners whereas in a Limited Partnership there can be an unlimited number of general and limited partners. Each partner in both types pays taxes on their share of the income. They will also be able to deduct losses against their other sources of income. Businesses with several owners, professional organizations (like law firms), and those looking to test out a potential business idea before forming a more formal company may find that partnerships are a useful option.
Limited Liability Company (LLC)
Because it enables owners to benefit from the advantages of both the corporation and partnership forms of business, the limited liability company (LLC), a hybrid type of partnership, is becoming the more preferred business structure. Profits and losses can be distributed among owners without the business itself being subject to taxation, and owners are also protected from personal liability, which is a benefit of this business structure. It is best to create an operating agreement that will outline management practices. You will also have to file with your state in order to get your LLC up and running.
Corporation
By submitting incorporation papers to your state, you can create a corporation, which is another type of business entity. There are several ways in which corporations are different from sole proprietorships, partnerships, or LLCs. Shareholders, directors, and executives make up a corporation. The directors oversee the whole business and create policies, the shareholders control the company's stock, and the officers manage daily operations. In a small company, one person may play several different roles.
A corporation is a separate legal entity from its stockholders, thus they are not held personally liable for the corporation's debts (the shareholder liability is limited to shareholder investment). In addition, corporations are subject to a number of legal restrictions that do not apply to other business entities such as holding frequent meetings and bookkeeping maintenance.
It is crucial to have a fundamental awareness of the various advantages and disadvantages of each kind of business entity. Making an informed choice can be aided by understanding the differences between business structures. A good place to start the process of deciding what structure is best for you is to consult with your local small business development center. The resources you will find there will typically be free and more detailed. This is a great way to start your journey in finding the best business structure that will meet your individual needs and vision.
The way you structure your businesses can have an effect on many aspects of your business. Everything from daily operations to taxes and how much of your personal assets are at risk is affected by the business structure you choose. You should choose a business structure that provides the appropriate balance of legal safeguards and benefits. It could be that you need some legal protections or the possibility to pass on your business in the future.
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