There are different types of businesses to choose from when forming a company, each with its own legal structure and rules. Typically, there are four main types of businesses:
- Sole Proprietorship
- Partnerships
- Limited Liability Companies (LLC)
- Corporations.
Before creating a business, entrepreneurs should carefully consider which type of business structure is best suited to their enterprise.
This article will provide a quick overview of these four basic types of businesses to help entrepreneurs make one of their most important decisions.
1 Sole Proprietorship
A sole proprietorship is an unincorporated company that is owned by one individual only. While it is the most simple of the types of businesses, it also offers the least amount of financial and legal protection for the owner. Unlike partnerships or corporations, sole proprietorship do not create a separate legal identity for the business. Essentially, the owner of the business shares the same identity as the company. Therefore, the owner is fully liable for any and all liabilities incurred by the company.
An entrepreneur may choose this option if they want to retain full control of the company. Additionally, it is a relatively easy and inexpensive process to establish a sole proprietorship. There are also tax benefits, as income is considered the owner’s personal income and therefore only taxed once. Finally, there are relatively few regulation requirements for sole proprietorship.
2 Partnership
As the name states, a partnership is a business owned by two or more people, known as partners. Like sole proprietorships, partnerships are able to take advantage of flow-through taxation. This means that the income is treated as the owners’ incomes so it is only taxed once. Owners in partnerships are responsible for the liabilities of the firm. However, there are some nuances to this. There are different types of partnerships: general partnerships, limited partnerships, and limited liability partnerships.
3 Limited Liability Company
Limited liability companies (LLCs) are one of the most flexible types of businesses. LLCs combine aspects of both partnerships and corporations. They retain the tax benefits of sole proprietorship and the limited liability of corporations. LLCs are able to choose between different tax treatments. As long as the LLC chooses not to be treated as a C corporation, it retains its flow-through taxation status.
Additionally, LLCs benefit from limited liability status. In LLCs, the company exists as its own legal entity. This protects the owners of the LLCs from being personally liable for the operations and debts of the business.
#4 Corporation
Corporations are a separate legal entity created by shareholders. Incorporating a business protects owners from being personally liable for the company’s debts or legal disputes. A corporation is more complicated to create, as compared to the other three types of businesses. Articles of incorporation must be drafted, which include information such as the number of shares to be issued, the name and location of the business, and the purpose of the business.
In sole proprietorship and partnership, if one of the owners passes away or declares bankruptcy, the company is dissolved. Corporations exist as a legally separate entity. Therefore, they are protected from this situation and will continue to exist even if the owner of the business passes away.