Before starting your company, make sure you’re familiar with all the different types of businesses. There are several different structures, and you should commit yourself to only one type of business. This choice will influence all of your day-to-day operations, taxes, formation costs, and much more. Take a look at the seven most popular business structure types and pick the one that will give you the right balance of benefits and legal protections.
Opting between the major organizational forms of companies is probably the most important decision you will make. This choice will affect many facets of your business, including its future. Once you learn what the different types of businesses are and what are their pros and cons, you’ll be able to align all of your goals and pick the perfect company structure.
There are four most common types of companies in the US based on what kind of service they provide. The first one is a service business that has no physical product. They offer professional skills, advice, or some other similar service. Another one is merchandising businesses that profit by selling products at a retail price without changing their form. The third would be manufacturing types that make and sell new products by using materials they acquire, and the fourth are hybrids. They can’t be classified as just one type, and the perfect examples are restaurants – they make food, sell drinks, and fill out customer orders.
Before you get into all of the types of businesses organizations, be sure that you have a budget that’s big enough and a good and doable plan of action. Whatever type of business organizations you pick, you must learn all there is to know about it such as how to start an e-commerce business or how a small business pays taxes. Get familiar with the legal structure and industry you’re entering, as well as the taxes you’ll have to pay. It’s also useful to know all about small business tax deductions. You should also decide how many employees you want to have and what the number of owners will be.
The best way to decide what business types suit your needs is to get a pen and paper and compare the pros and cons of the most popular ones. Once you weigh them, you will have an idea of which one is exactly what you’re looking for. Use different resources, explore different types of business, and try to make a decision on your own. If that doesn’t work for you, you can always get help from a professional and consult an accountant.
There are two structures to choose from. The first one is informal, which is great for testing a business in a low-risk environment without spending too much money and time on it. This option is also great for starting an enterprise with clients you’re already familiar with. The bad side of informal structures is that they don’t have any asset protection. That means that if someone sues you, your savings and property are at risk.
Asset protection is perfect for organization forms that make a significant amount of money, work with people they don’t know, and they’re growing rapidly. Formal structures have this protection, and they’re more credible than informal ones. They’re far more complicated, which also makes them not that good of an option if this is your first time running a micro-enterprise. They have double taxation as well, which makes them more expensive than informal structures.
This is the most straightforward and most convenient operating structure where just one person does everything. The owner is the only liable and responsible individual. There are no filing fees, but they still might have to get some licenses or permits, depending on the type of business. Still, there’s much less paperwork to get started than in other structures. Make sure you check with your state if there are some specific requirements. You will only need to file one tax return since the owner and the enterprise are the same legal entity. This option is perfect if you want to get started right away and you don’t want anyone to be your partner.
This structure has some disadvantages as well. For example, a sole proprietorship can’t go into business with another person, and you will be the only one who’s responsible for all the possible trouble and debt. Since there’s no asset protection, your house, car, or any other possessions are at risk if anything goes wrong with your enterprise. Another problem is fewer fundraising options because you can’t sell shares.
A general partnership is an informal structure where at least two people share all management and financial decisions and obligations. This is the most common of all forms of partnerships, and it doesn’t have a lot of legal stuff to go through when you decide to start it. It’s recommended that you draft articles of partnership that will determine everyone’s responsibilities and how the partners will share profits and losses. This will create a solid foundation that you can build your enterprise on instead of having to deal with it afterward and having disagreements. One of the biggest advantages is that you will be able to have partners experienced in that specific field and attract more people to work for you. Banks will also be more likely to give you a loan because more than one person can pay it back. However, this still means that you will have unlimited liability and that you’ll be responsible for your partners’ actions.
If one of the partners is silent when it comes to management, but they still take part in funding the enterprise, that’s called limited partnership. These partners are also called investors, and they have no control over the operations – that is the responsibility of the general partner. You will have to file documents with the state to form the entity. The limited partner doesn’t have any personal liability, and they also don’t have a salary. They can receive money through compensation based on the allocation of profits.
One of the most simple and flexible, and yet formal and credible structures is the LLC. What makes it so desirable? Here are a few reasons:
A corporation is a legal structure that’s usually created for making a profit. It can enter contracts, own assets, borrow money, remit taxes, and sue or be sued. An individual can create a corporation, but so can shareholders or stockholders, and to do that, they need to finish a process called incorporation. It means that they will acquire all the documents that will determine the enterprise’s purpose, name, and location. After incorporation, the owners aren’t personally liable for any lawsuits or claims.
If corporations are made for profit, the most popular forms are C- and S-corp. What is the difference between the two? A C-corp contains almost all attributes of a corporation, and they’re the most popular entity in the US. It protects the owner’s assets, and it’s a separate taxpayer, which means that there will be double taxation. They have unlimited growth potential and the ability to sell capital to raise money. There’s no limit on the number of shareholders, and you will get to enjoy a tax deduction. The disadvantages are that this is not the best option if you’re not already familiar with enterprise ownership since there are a lot of regulations and expenses.
S-corp is more attractive for micro-enterprise owners. They can have up to a hundred shareholders (it varies by state), and the owner must be a US citizen or a permanent resident. Like with the LLC, there’s pass-through taxation, which can be risky since the employer has to share the entity’s profit and loss on their personal tax returns. On the other hand, that eliminates double taxation, making this option more attractive. The capital can be raised by selling shares, but since there’s a limited number of shareholders, a vast majority of employers choose C-corp.
Earning money isn’t the most important thing with corporations – many religious, educational, or charitable organizations also use the corp system. They’re exempt from taxation, and all of the donations they get are used for the goals of the organization.
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