To ensure the success of your new business, it is recommended that you seek professional advice and avoid doing everything on your own. Described below are the different forms of legal business structures – valuable information that will help you in selecting a business structure that best suits your needs and requirements.
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Sole proprietorships – These types of businesses are popular, because to start one, all you need to have is a Social Security Number. No doubt, you will also be required to get the necessary permits and licenses as applicable in your state, but since getting those is usually quite easy, you can always consider starting your business as a sole proprietorship.
Many business owners start their companies as sole proprietorships and convert them later to Partnerships or LLC’s (described later in this article).
The only drawback of sole proprietorships is that you do not have adequate protection against business liabilities. For example, if you have taken out a business loan and are unable to pay the installments, your creditors can get a court order to attach your personal assets and sell them at an auction.
The proceeds will then be distributed proportionately between your creditors per the ratio stated in the court order.
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Partnerships – Partnerships are composed of two or more individuals and are given preference when it is just not possible for a single individual to shoulder all the responsibilities of the proposed business plan.
Partnerships can also be created between two business entities as well as between an individual and a business enterprise. The obvious benefit of partnerships is the shared liability.
- General Partnership – In these types of businesses, all partners have equal rights related to management control and day-to-day business decisions.
- Limited Partnership – In a Limited Partnership, only a few partners have management authority, and the rest just play a supporting role. The exact ratio of active and supportive partners varies, depending on what exactly is stated in the partnership contract.
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Limited Liability Partnerships – In these types of businesses, the liabilities of each individual partner is predetermined. Thus, each partner has adequate protection against business liabilities that might arise due to the actions of other partners or employees working for the organization.
However, this is not something that is perfect – because a partner will still be asked to pay his share as stated in the predetermined ratio, even though they may not be responsible for the business liability.
- Corporation – These types of businesses are formed according to the laws of the state they are formed in. They have their own distinctive legal identity, independent from its promoters, board of directors, and shareholders.
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Limited Liability Company (LLC) – These types of business enterprises have access to conventional benefits such as limited liability, without the heavy reporting burdens that corporate entities are normally required to meet. These businesses also share some characteristics with that of sole proprietorships and partnerships.
Another great benefit of LLCs is pass-through taxation. This means that the revenues of the business are passed through to the owners’ personal income tax returns.
When it comes to structuring your small business, you can choose any of these legal business entities; but if you really want to succeed, you should speak with your accountant to properly assess the pros and cons of each one.
