Starting a business is no easy task, and you’ll need to understand the process behind it. Apart from that, you have to consider four different types of business organizations. It’s one of the first and single most important things you need to decide on before even building a business. Whatever you choose, it will indeed affect multiple factors. One of these is the future of your business. Whatever business form you end up with will affect your taxes, legal liability, operational costs, and costs of formation. So you must choose wisely. But first, browse this site to know the pros and cons of starting a small business.
The simplest and most common business form is a sole proprietorship, which someone for their own benefit runs. The existence of the business depends and relies on the owner’s presence. So if the owner no longer runs it, it will die. Some of the benefits include that all profits will go to the owner, there’s little regulation for the proprietorships, and owners have complete flexibility when running their business. Plus, there are a few requirements when starting a sole proprietorship.
As of the moment, there are two kinds of partnerships. General partnerships mean both owners invest their money, property, labor, and more. Limited partnerships require a formal agreement between the owners, and it allows owners to limit their liabilities for their business debts, which depend on their investment or portion of ownership. However, partnerships mean more capital for the business since there are two owners. Both partners share the profit, and it’s also flexible like a sole proprietorship. Finally, establishing a partnership is cost-effective.
Corporations are more complex compared to the first two mentioned. For tax purposes, corporations are separate entities and are considered legal persons. That means the profits generated are taxed as personal income by the company. After that, any income distributed to the shareholders as dividends or gains is taxed again as the said owners’ income. Some benefits of building a corporation are that it limits the owner’s liability to losses, both profits and losses belong to the corporation, and owners can use personal assets to pay for debts.
Limited Liability Company or LLC
It’s a lot similar to a limited partnership, where owners have limited liability and, at the same time, provide the income advantages of a partnership. Both the benefits of a corporation and a partnership are combined in an LLC. But they mitigate the disadvantage of each. In addition, owners share the profits without double-taxation.