When starting a business, there are several things you need to consider. One of the most important is the type of business structure you want your business to have. Implementing different types of business structures come with various advantages and disadvantages depending on their scale and type.
These structures attract unique tax and liability obligations. Below are six types of business structures you should consider before starting a business.
1. Sole Proprietorship
If you prefer working and running your business alone, the sole proprietorship is the best option for you. It is the most straightforward business structure as it involves only one person running the business. With a sole proprietorship, you have full control of your business and can run it the way you want. This structure has many advantages, which include paying lower taxes to the government. The beauty of not having to consult anyone when making decisions is a huge attraction as well.
However, sole proprietorship also comes with some serious disadvantages. For one, you are liable for debts that the business accrues. This means your personal assets can be attached by a liquidator seeking to pay off debts.
2. General Partnerships
In a general partnership, a sole proprietor seeks to add a few people as co-owners of the business. Each partner is required to contribute an equal amount of capital to bring them to equal ownership of the company. The beautiful thing with this arrangement is that there are more brains to run the business, thus increasing its chances of success.
The advantages of a general partnership are more or less the same as those of a sole proprietorship, the only difference being that all decisions have to be run, and agreed upon, by every partner before action is taken. The downside, however, is that each partner risks having their personal assets seized should debt collectors descend on the company to collect.
3. Limited Partnership
Limited partnerships involve having a few people as general and others as limited partners. Limited partners have limited liability when it comes to the collection of debts. This means that a limited partner shares in the partnership’s profits and losses, but only to the extent of their investment.
On the other hand, a general partner shares fully in the partnership’s profits and losses. As a result, a general partner has more say in the operations of a limited partnership since they stand to lose or gain more depending on the fortunes of a company. A limited partner is also not involved in the day-to-day operations of the business. They are, however, expected to participate when important decisions regarding the running of the company are being made.
4. Limited Liability Partnership
This is a partnership where every partner is a limited partner. The partners share in the full profits and losses of the business, but only to the extent of their investment. There is no personal liability involved in this structure. Limited liability partnerships are mainly preferred by professionals such as lawyers and accountants who would not want to be held personally liable when the business incurs loses or goes under.
For a large company, operating under a corporation structure is highly effective. Corporations enjoy several privileges and rights when it comes to the liabilities of the various people running them. However, the many financial advantages are often offset by the hustle that one goes through when setting up the business. Licensing fees for corporations are usually higher compared to partnerships. You also have less control in your business due to the legislation surrounding setting and running a corporation.
There are different types of corporations. Some are for-profit, while others are non-profit corporations, which are mainly formed to further an agenda rather than make a profit. They have a completely different set of licensing requirements. They are also usually not taxed the same way for-profit corporations are taxed.
6. Limited Liability Company
Limited liability companies are formed by one or more entities through a special agreement that details several critical factors regarding the running of the business. The company is a different entity from the people that formed it. Loses are only liable to the company as an entity and not the people involved in running it. Limited liability companies are allowed to operate for as long as they stick to the laws and regulations establishing them.
Understanding the business structure that best applies to you is important when considering the future of your business. The size of your business also dictates the specific structure your business is likely to fall under. It is also important to understand the vision and purpose of your business before settling on one structure or the other. For instance, if you are a control freak, a sole proprietorship could be the best structure for you.
On the other hand, if you want your business to grow and perhaps expand into other markets, having a limited liability company or a corporation might just be what you need.