When forming a business, it is important to choose the appropriate business structure. There is no silver bullet that is right for everyone. Some people are able to easily acquire start-up capital and have a business which lends itself to a larger structure. Others just need to be able to open business accounts at banks and do not need to expand beyond a few members. Being aware of the different types of business will help you to make an informed decision.
In a sole proprietorship, a single person owns the entire business. The owner accepts all accountability for the actions of the business--both legal and financial. If he creates a product which results in harm or death, for example, he will be held personally accountable. Legally, the owner and the business are not distinct entities. In spite of this, the owner of a sole proprietorship may choose to do business with a different name than his own. Although there are risks due to accountability, this type of business has the advantage of being easy to start due to fewer regulatory impositions and lower initial costs than other forms of business.
Partnerships come in various forms, including general and limited. In a general partnership, owners, called partners, share both the risks and benefits of the business--including any profits or debts which may result. Limited partnerships are a type of business in which there are "limited partners" in addition to the general partners. A limited partner only has partial ownership of the company, but also only shares limited liability for the company's actions.
Corporations are treated as separate entities from the owners of the business. This type of business consists of a number of shareholders, each of whom has some say in the company's actions. The more shares held by an individual, the more votes they have regarding company policies. In addition to being treated as a separate legal entity, corporations are often given the same rights as human beings in certain legal matters. For example, they enjoy some of the constitutional protections granted to humans and have legal rights such as the power to sue. Because of their legal status as a person, corporations, as opposed to shareholders, bear responsibility for all company actions.
In the United States, several different kinds of corporation exist, including S corporations, C corporations and limited liability companies. S corporations differ from C corporations in how they are taxed. In an S corporation, there are no corporate taxes. The company is taxed as if it were a sole proprietorship. There are strict requirements to forming an S corporation, including a limit of 100 shareholders or less. C corporations pay taxes at a corporate level. Limited liability companies, or LLCs, are like S corporations in that they are not taxed at the corporate level. They also have far fewer requirements regarding company administration. The downside to an LLC is that it is difficult to transfer ownership if you ever want to sell the business or resign.
- Modern corporate building image by Christopher Dodge from Fotolia.com