When starting a small business, you need to know about the different types of business organizations you can create. The type of business you can create will depend on the number of owners your business will have. When deciding on the type of business you want to run, you also need to consider whether the business form provides limited liability. A sole proprietorship does not offer limited liability and is therefore not synonymous with the abbreviation “ltd.”

Sole Proprietorship

When you own a sole proprietorship, you have no co-owners, and you own all of the assets of your business. In addition, your sole proprietorship functions as an extension of you, the owner. As a result, when the business owes a debt, you also owe that debt. If your sole proprietorship gets into a large amount of debt, this could spell financial ruin for you as the owner. This happens because an owner of a sole proprietorship does not enjoy limited liability. The owner holds unlimited liability.

Limited Liability

When a business enjoys limited liability, the owner of the business can only be held liable for the debts of the business up to the amount he invested in the business. Take this example: John owns a business that enjoys limited liability. He contributed $100,000 to run the business. In the event that someone sues John’s business and obtains a judgment of $200,000, John would only lose his $100,000 investment.

Unlimited Liability

When a business holds unlimited liability, the owner of the business can lose his investment in the business and his personal assets. Take this example: Jim owns a sole proprietorship. He contributed $100,000 to the sole proprietorship. If someone sues Jim’s business and obtains a judgment of $200,000, Jim would lose the $100,000, and he could lose $100,000 of his personal assets to cover the judgment.


“Ltd.” denotes that a business holds limited liability. This can never be the case with a sole proprietorship. If you want to form a business that holds limited liability, look into forming a limited partnership, a limited liability partnership, a limited liability limited partnership, a corporation or a limited liability company. Presuming that you will be the sole owner of the business, you could form a limited liability company, as only one owner is required for formation. If you decide to create a limited liability company, you will need to come up with a name for the company. You must include either the words “limited company” or its abbreviation, “LC"; “limited” or its abbreviation, “ltd”; company or its abbreviation “co.”; or “limited liability company” or its abbreviation, “LLC.”