If you’re hopping on your first venture, it can be difficult to make out the differences between different types of business entities. Each type has its advantages and inconveniences, and choosing the right one is essential for the future of your business. It will also make a huge difference on how you operate it, and your plans for the future. In this article, we’re going to take a closer look at some of the most common business structures – sole proprietorship, general partnership, limited liability company (LLC), and c-corporation – and help you find out which one would be the best for your organization.
Sole Proprietorship
Sole proprietorships are the easiest type of business to start, and the easiest to understand as well. As a sole proprietor, you’re the only person to own and operate the business. If you start any kind of business venture and you are alone, then your business will automatically be classified as a sole proprietorship legally.
One of the major things that differentiates sole proprietorships from other business entities is that you are under no obligation to have your business registered. However, you will still usually need to seek licenses or permits depending on our particular line of business.
Service professionals, freelancers, and consultants often run as sole proprietors. It is also common for bigger businesses with only one owner to run as a sole proprietorship, like retail stores for instance.
The biggest benefit of sole proprietorships is that they’re easy to start, and you don’t have to worry about complicated paperwork. Filing taxes is also easy, and a large portion of your business losses could be deducted from your personal return.
The issue with sole proprietorships, however, is that you and the business are one entity. So, if someone seeks legal action against your business, your assets are liable. This goes for any outstanding debt as well. And building business credit is also more difficult.
General Partnership
General partnerships are very similar to a sole proprietorship, with the exception that 2 or more people operate the business. What differentiates general and limited partnerships is that with general partnerships, both owners manage the business actively and share the losses and profits.
The pros and cons of general partnerships are also similar to sole proprietorships. There is little to no paperwork involved, and you don’t have requirements like meeting minutes for instance. However, you don’t have to carry the load on your own as the losses are shared equally.
Still, partners are personally liable for debt, losses, and legal action, meaning that your assets could be seized. In addition, some states will hold partners liable for another partner’s actions.
Limited Partnership
Limited partnerships have significant differences with general partnerships. For one, this type of entity will have to be registered with the state. In this case, the limited partners are often referred to as “silent” partners, and are solely investors. The general partner will be responsible for actually managing the business. They also will assume most of the liability.
Limited partners will carry less of the load, and won’t be taxed as much either, as their role within the company will be more tangential.
One of the great things about limited partnerships is that they make fundraising easier. Investors don’t have to worry about being liable. The general partner can still maintain control over the business’s operations. And limited partners are free to go whenever they want without having to dissolve the partnership.
On the other hand, the general manager is still open to litigation, and their assets are at risk. Furthermore, limited partners could also find themselves liable if their role within the business is too active. And there is some paperwork involved.
LLC
LLCs are a very popular type of business, and have a number of benefits as well. But what is an LLC exactly?
An LLC, or limited liability company, is a separate entity from the business owner and acts as its own legal person. If you want to form an LLC, you’ll have no choice but to register it with the state. However, registering is much simpler than other types of corporations. You also have the option of filing taxes as a company or as a pass through entity.
But the biggest benefit of LLCs is that your assets will have an additional layer of protection. If there’s a judgement against your business, it will be your business’s assets that will be liable, not yours. However, there are some cases when you could also be on the hook if personal negligence was established.
If you want to learn more about LLCs in general, we suggest you check out howtostartanllc.com. You’ll learn everything from how to form an LLC, the different types of LLCs, and advice on whether it’s the right business entity for you. You’ll also learn where the best states to form an LLC are.
C-Corporation
A C-Corp is another form of legal entity, but involves more than an LLC. C-corps will have shareholders, officers, and a board of directors. However, you can form a C-Corp where you’ll fill all these roles yourself.
These types of businesses require a lot more paperwork, and have to abide by more regulations. Taxation will be significantly different as well. If you want to form a corporation, the fees, method, and paperwork will differ from state to state.
The major benefit of forming a C-Corp is that shareholders will not be liable for a company’s liabilities and debts. In addition, C-Corps have a number of tax benefits that other business entities don’t have access to. Raising money is also easier, as you can issue stocks options.
However, forming one can get expensive, and could cost you up to $500 in certain states. You’ll also be subject to double taxation, as tax will have to be paid on the corporation’s profits and the dividends. There is also a number of obligations corporations have to fill, such as creating bylaws, holding shareholder and board meetings, and keeping meeting minutes.
As you can see, different business entities are largely different, and each has their set of benefits depending on your particular line of business. Make sure that you study them all in detail so you can find the best option for you.
