What Types of Businesses are there?
When forming a business, you can choose between different types. Each has its own rules and legal structure. There are typically four types of business: Sole Proprietorships; Limited Liability Companies; and Corporations. entrepreneurs need to carefully choose the type of business structure that is most suitable for their business.
This article provides a quick summary of the four types of basic businesses that can help entrepreneurs make a crucial decision.
1. Sole Proprietorship
Unincorporated companies are owned by a single individual. It is one of the simplest types of business, but it offers the least protection in terms of legal and financial matters. Contrary to partnerships and corporations, sole proprietorships don’t create a distinct legal identity for their business. The owner shares the same legal identity as the company. The owner is therefore fully responsible for all obligations that the company may incur.
This option is available to entrepreneurs who want to maintain full control over their company. It is also relatively inexpensive and easy to set up a sole proprietorship. Tax benefits are available, since income is taxed only once and considered to be the owner’s personal income. There are also relatively few regulations for sole proprietorships.
2. Partnership
A partnership is an organization owned by two people or more, also known as partners. Partnerships can also benefit from flow-through taxes, just like sole proprietorships. The income is taxed only once, because it is considered the income of the partners. The partners are liable for the debts of the partnership. There are some subtleties to this. There are three types of partnership: limited liability, general, and limited partnership.
General partnerships: This type of partnership is easy to form and has low maintenance costs. Each partner has unlimited liability and is considered to be a participant in the operation of the business. It means that the assets of each partner can be used to pay off the liabilities of the business partnership. Each partner is also responsible for the actions of each other.
John and Dave, for example, are partners in a general partner. Dave’s assets could be used in a lawsuit against John for malpractice.
Limited Partnerships: This partnership type has at least one partner. The general partner is responsible for managing the business and has unlimited liability. Limited partnerships also have limited partners. Limited partners are only liable for the amount of their investment in the company. Limited partners do not participate in the management of the business and have no direct control.
Limited-Liability Partnerships (LLPs): LLPs work similarly to general partnerships in that multiple partners share responsibility for the operation of the business. LLP partners are not responsible for their actions or those of other partners. Unfortunately, not every business can be an LLP. This type of business is usually restricted to certain professions such as accountants.
Partnerships are more flexible than other business types, but they also carry a greater risk.
3. Limited Liability Company (LLC).
Limited liability companies are among the most flexible business types. The LLC combines aspects of corporations and partnerships. They maintain the tax advantages of sole proprietorships, and the limited liability that corporations provide. The LLCs can choose from different tax treatment options. So long as an LLC does not choose to be treated as C corporation, its taxation status is still flow-through.
Limited liability companies also benefit from this status. The company is its own legal entity in LLCs. The LLCs protect the owners from personal liability for the debts and operations of the company.
4. Corporation
Shareholders create corporations, which are separate legal entities. By incorporating a company, owners are protected from personal liability for debts and legal disputes. The process of forming a corporation is much more complex than the other types of business. The articles of incorporation, which contain information like the number of share that will be issued, as well as the name and address of the company, must be written.
If one owner dies or declares bankruptcy in a sole proprietorship or partnership, the company will be dissolved. Corporations are a separate legal entity. They are therefore protected and continue to exist, even if their owner dies.
Three main types of companies exist:
C Corporation: The most common type of incorporation. The corporation is taxed like a business and the owners get profits which are taxed separately.
S Corporation: Similar to a C Corporation, but can only have up to 100 shareholders. S corporations are pass through entities, like partnerships. Profits are therefore not taxed two times.
Non-Profit Corporation: Non-profit corporations, often used by charities to raise funds, are exempt from tax. All incoming cash flows must be used to fund the organization’s operation or its future plans.
Business Examples
Small businesses often start as sole proprietorships. Many businesses convert to corporations as they expand and grow. eBay was a famous sole proprietorship which eventually became a corporation.
Hewlett-Packard, is a famous and successful partnership. As they grew they were eventually incorporated into a corporation in 1947. The company was founded as a partnership between two friends.
Chrysler has become one of the biggest automobile manufacturers in America. Chrysler has been a limited-liability corporation (LLC) since its founding.
Apple is one of the most well-known companies. Apple Inc. was formed shortly after Apple began operations, just like most other large companies listed on stock markets. Apple is still one of the biggest companies in the entire world. Apple has survived despite the death of Steve Jobs, one of its founders.
