You might think about the structure of your business when you are starting up a new business. Will you go solo or form a business partnership?
Five common business structures
1. Sole Proprietorship
A sole ownership business is the simplest and most basic type of company to start. The business is the same as you. You are entitled to all profits, and you’re responsible for your business’s losses, debts and liabilities.
As with all businesses, you don’t need to do anything formal to start a sole proprietorship. However, you will still have to get the necessary permits and licenses.
2. Partnership
A partnership is an enterprise in which two or more individuals share ownership. Each partner is responsible for all aspects of a business, whether it’s money, property or labor. Each partner receives a share of the business’s profits and losses.
Due to the fact that partnerships are a multi-person decision-making process, it is important to discuss and create a legal agreement. These agreements are not required by law, but they can be helpful to ensure that future business decisions will be made in a way you understand.
3. Corporation
A corporation, also known as a C Corporation, is a legal entity that is owned by its shareholders. The corporation itself, and not its shareholders, is legally responsible for any debts or actions the business takes.
Corporate structures are complex because they have more complicated tax and legal requirements, as well as higher administrative costs. Due to these issues, corporations tend to be suggested for larger, established companies with many employees.
4. Limited Liability Company
A Limited Liability Company is a hybrid legal structure which combines the features of a corporation with the tax efficiency and operational flexibility offered by a partnership.
Members are the “owners” or “owners of an LLC”. Depending on which state you live in, members can include a single person (one owner), a group of individuals, corporations, or other LLCs.
LLCs, unlike shareholders in a corporation are not taxed separately as a business entity. All profits and losses of the LLC are instead passed on to the members. LLC members must report their profits and losses to the IRS on their individual federal tax returns just as a partnership owner would.
5. Cooperative
A cooperative is an organization or business that is owned and operated by those who use its services. These cooperatives are common in the healthcare, retail, agricultural, art, and restaurant industries. The profits and earnings generated by a cooperative are shared among its members, or user-owners.
A board of directors, officers and regular members are elected to run the cooperative. Regular members can vote on the direction the cooperative will take. The members can join the cooperative by buying shares. However, the number of shares that they own does not influence the weight of their votes.
Which business structure is best for your small company?
Consider contacting a mentor to help you determine what’s best for you.
