As an up and coming entrepreneur/business owner, there are definitely many things to consider before you start your business. Topping the list of initial decisions that will affect your venture into the entrepreneurial world is what type of business you are. You need to identify what is important to you when running your business. Depending on which type of business you’ve selected: the tax you’ll have to pay, the ability to raise capital, or even the personal accountability or paperwork you’ll need to do will greatly differ.
Sole Proprietorship
This type of business lives and dies by one individual only, as it is managed and owned by solely one person. It is the most common type of business but it also grants the lowest amount of protection. It offers no legal distinction between YOU, the owner, and the business. This basically means that any debt or profit accrued shall be solely your personal responsibility, thus giving you the upside of the unlimited potential and the downside of unlimited liability in case of losses and debts.
Single specialist services such as florists, wedding planners, carpenters or plumbers often fall into this category. Since sole proprietorships are not considered as legal entities yet, it is the easiest to set up. You just need the appropriate business permits and licenses… and voila, you’ll be running your business in no time.
However, albeit being a simple ordeal in setting up this type of business, it is also quite difficult to make it successful. You will have to work long hours, keep track of financial records, and possibly miss holidays and important occasions. Plus, if you’re looking to raise capital by making investments or are planning to have partners join you in the future, then this is definitely not the ideal type of business for you.
Partnership
When two or more individuals pool their money, property, or industry and who then own, share profits, and manage a business, this type of business is called a partnership.
There are 3 different kinds of partnerships:
- General Partnerships – the simplest type of partnership where the partners share the unlimited liability for the debts and obligations of the partnership. This means that each partner’s assets can be used to repay any debts or liabilities to the business.
- Limited Partnerships – this type has one or more general partners who manage the operations of the business and take on the unlimited liability of the business. The other partners are called limited partners and usually have liability only up to the amount of capital they have contributed to the business.
- Limited Liability Partnerships (LLP) – similar to general partnerships, there are multiple people who share the responsibility of the business. The major difference is that each partner’s liabilities are limited to the amount they contributed to the business. Should the partnership fail, creditors are not able to go after a partner’s personal income, properties or assets.
Corporation
This type of business is a separate legal entity owned by various people (shareholders) who all have a limited obligation and liability to the business. Shareholders are responsible for the debts of the corporation to a certain degree, depending on the extent of their contribution to capital. If one of the owners dies or declares bankruptcy, the business will still continue to exist.
The 3 most common types of corporations are:
- C Corporation – the most common form of incorporation. It is taxed as a separate business entity and owners gain profits and pay taxes separately.
- S Corporation – has the same function as a C corporation but can only accept up to 100 shareholders.
- Non-Profit Corporation – this type of corporation is tax-exempt and most often is used by humanitarian organizations. They must operate without generating profits and any income is to be spent on management and operations of the business.
Limited Liability Company (LLC)
A limited liability company (LLC) is a type of business that fuses the unique traits of a corporation and that of sole proprietorship or partnership. Partners or owners are not held liable for any of the business’ liabilities or debts. They basically retain the tax benefits of sole proprietorships without the liabilities associated with it. Similar to corporations, the business exists as a separate legal entity and will continue to exist even if one of the partners passes away or declares bankruptcy.
Starting a business can be a daunting task, however identifying the pros and cons of what type of business suits you best, will work wonders in the long run. Keep these in mind on what kind of path you want to take for your business. Are you fond of making decisions alone without having to answer to everyone? Or would you rather build your business with friends and close confidantes with who you can share the ups and downs?
No matter what your decision is, know that True Client Pro is here to help you every step of the way. From creating proposals to finalizing contracts and managing your prospects, we are your friend and partner in making your dream a success! We’ll do the heavy lifting for you!
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