When starting a business, you have to decide which business structure (also legal structure or business form adopt. If you are simply in business for yourself and don’t plan on hiring employees, you may be able to get by as a sole proprietor. However, large companies are generally incorporated, which provides certain benefits in terms of liability protection and the complexity required for a large company.
Each business structure has its advantages and disadvantages, and since each business has unique needs and goals, you need to do your research before choosing.
Types of business structures
Below is an overview of the various types of business structures, including sole proprietorships, partnerships (both general and limited), limited liability partnerships (LLC), corporations, non-profit corporations, and cooperatives (cooperatives) .
Sole proprietorship
A sole proprietorship is perhaps the simplest of all business structures. Unlike LLCs and corporations, there are no papers to file and there are no fees to pay to establish individual property. You are the sole owner of your business, and you simply have to begin business operations to create a sole proprietorship.
In terms of the legal entities involved in an individual property, you and the individual property are the same thing. This means that you will pay taxes on any business gains as income on your personal taxes, and if your business has any obligations (such as a court judgment or past due debt), you are personally liable for them.
Collaborative partnerships
A partnership is like a sole proprietorship in the sense that it is simply a business owned by two or more people. Similar to a sole proprietorship, the owners of a partnership do not need to present any documents or pay any fees to establish a partnership, the partnership simply begins when you start a business with one or more people. Also as a sole proprietorship, each partner will report their share of the business’s profits on their personal taxes as income, and each partner is personally liable for any debts, claims, or other liabilities for which the business is liable.
Limited partnerships
Unlike a general partnership, a limited partnership costs money and can be very difficult to establish. Limited partnerships are not the best option for a small business that has little personal liability potential. Limited partnerships are normally organized by one or more people, the ‘general partners’, who are responsible for getting others to join the partnership as ‘limited partners’.
General partners direct most of the day-to-day operations of the limited partnership. General partners are personally liable for any debt, lawsuits, or other liabilities that the limited partnership has, except if the general partner is a corporation or LLC. Also, like a partner in a normal partnership, the general partners of a limited partnership will participate in the profits of the business and report this income on their personal income taxes. Limited partners are not personally liable for any of the responsibilities of limited partnerships, and therefore are not included in many of the day-to-day operations.
LLC and GL companies
Although creating and maintaining a corporation or LLC will likely be more complex and expensive than creating a sole proprietorship or partnership, it can be worth it for your small business depending on the type of work you plan to do. Perhaps the main reason you would want to organize your business as an LLC or corporation is to protect yourself from any personal liability that may arise from your small business business.
Although LLCs and corporations are similar in many respects, what really sets a corporation apart from other types of business structures is that a corporation is its own legal and tax entity. A corporation pays its own taxes on any profits it holds, and the owners of a corporation only pay income taxes on the money they take out of the corporation in the form of wages, dividends, and bonuses.
An LLC, like a corporation, provides limited liability to LLC owners for business liabilities, including debts, lawsuits, and others. When the LLC differs from a corporation, however, it is in terms of taxes. Unlike a corporation, an LLC is not its own separate taxable entity, and owners of the LLC must pay personal income taxes on their share of the profits that the LLC maintains during the tax year.
Organizing your business as a corporation or an LLC makes sense in two situations. First, if the business engages in dangerous activity that makes it more prone to being sued, or if the business has the potential to accumulate large amounts of debt, then a corporation or LLC may be a good idea to protect owners of personal liability. Second, if any of the business owners have large amounts of personal assets that they want to protect from any potential liability associated with the business, a corporation or LLC might be the best option.
Non-profit corporations
A non-profit corporation is simply a corporation that was formed with the intention of carrying out a purpose that is charitable, educational, literary, religious, or scientific. A nonprofit corporation may solicit charitable donations from the public, and may also try to raise funds by seeking private grants from businesses and individuals. One of the greatest benefits to a nonprofit corporation is that money received for charitable purposes is not normally taxed by the federal or state government.
Co-ops
A Co-Op is a business that is more associated with grassroots organizations. These businesses are owned and operated by the Co-Op members in a democratic manner. Most of the time, a Co-Op is made up of consumers who want to create a friendlier place of business. As such, these organizations often spring up in the form of a grocery store or child care center. There are some states that have written laws regarding the setup and operation of Co-Ops. If you would like to know if your state has laws regarding Co-Ops, you should contact your secretary of state.