When you have a great business idea, there is no reason why you should not run with it and put your product out there. However, the technicalities of opening and operating a business will initially depend on the type of business structure you choose. There are four primary legal business structures, including a sole proprietorship, partnership, corporation, an LLC, or limited liability company. It is critical to understand each type of business structure before making your choice.
A sole proprietorship is the most common type of business organization. It is simple to form and offers complete managerial control to the sole owner. When a business is a sole proprietorship, the sole owner is also personally and financially liable for its obligation. A partnership involves two or more people who agree to share in the profits and losses alike. One of the primary advantages of choosing a partnership as your business structure is that a partnership does bear the tax burden of profits or the benefits of losses. Both profits and losses are passed through to the partners who report on their individual income tax returns. However, each person, as in the sole proprietorship, is personally liable for financial obligations.
Corporations are a legal entity when it comes to conducting business, separate from its founders. Corporations are taxed and held legally liable for its actions and able to profit from its products, services, and actions. Corporations are beneficial because founders can avoid personal liability, although there is a high cost to form a corporation and extensive record-keeping required. Sometimes, there is double taxation involved. Lastly, LLCs, or limited liability companies, are becoming more popular. LLC creation can be beneficial because it allows owners to take advantage of a partnership and corporation's same benefits. Profits and losses can be passed through to owners without taxation.
As you mull over the types of business structure and choose the best one for your business, there are a few factors to think about. Consider legal liability. How much of the business' legal dealings do you wish to be insulated from as a business owner? Corporations are separate legal entities, while partnerships and sole proprietorships mean that you are held liable for all legal and financial obligations. Also, consider the tax implications. Which business structures offer opportunities to minimize taxation for you or your partners or founders? Corporations sometimes require double taxation, while LLCs minimize taxation.
When you are considering business structure, also look into the cost of formation and ongoing administration. LLC creation is often easier, and it is easier to find resources to work with professionals that help you form limited liability companies with minimal fees, even in the long-term. Corporations tend to be the most expensive to form and have the most paperwork and administrative duties in the long-term.
As you go through the four primary business structures, review each carefully, and make an educated choice for your business, products, and life in the long-term. Your choice may affect how your company succeeds in the future, so take your time in making an informed decision.
