If you’re thinking of starting your own small business, you may be wondering about the different types of small business structures, and which would be most advantageous for you. These business structures define many things about your business, including how ownership, finances, liabilities, and taxes are all managed.
Partnership
When ownership responsibilities are shared among two or more people, a partnership can be formed. There are three different types of partnerships which you might choose from, including general partnerships, limited partnerships, and joint ventures. Limited partnerships reduce liabilities for one or more of the people involved in the partnership, based on their investment percentages. Joint ventures limit the involvement of partners based on a specific time frame. For a partnership to work effectively, it’s best if the people involved know each other very well, and have had prior professional dealings with each other.
Corporation
A corporation is a legal business entity which is owned by shareholders, and which is responsible for all debts and liabilities, even though shareholders own the business. Corporations are generally well-established companies, since they are subject to costly administrative fees and double taxation, both at the corporate level and at the shareholder level. In order for a business to be sold to public interests, it must be a corporation.
Sole proprietorship
This is easily the most popular type of small business structure, with it being owned by either a single person or sometimes married individuals. Sole proprietors have far less tax responsibilities and a good deal more flexibility to run their business. The downside of a sole proprietorship is that you are responsible for all debts incurred by the business, and your personal assets are exposed in the event of any kind of litigation.
Limited Liability Corporation (LLC)
A limited liability corporation is a small business structure which is a kind of hybrid between a corporation and a sole proprietorship, in which company owners are protected up to a certain extent from litigation. The owners of an LLC are known as members, and the LLC itself is one of the most flexible of all business structures. It’s also very inexpensive to set up this type of business structure, which makes it a good option for all new businesses.
S-corporation
There are several advantages available to owners of an S-corporation, as opposed to the standard variety of corporation which is known as a C-corporation. An S-corporation avoids the double taxation which normally happens with the standard corporation, and offers owners a tax savings shelter. As long as owners observe appropriate rules regarding how payroll is distributed and the proper number of shareholders, it can be a very useful business structure. Quite often, when an LLC becomes profitable enough, it can be converted successfully to an S-corporation to take advantage of tax savings.
Cooperative
A co-op is a small business structure which is most similar in structure to a non-profit organization, and is in effect a business belonging to those members who make use of it. This makes users of the business the owners, and in fact these individuals are often called member owners or user owners. In a cooperative, there has to be an agreed-upon set of bylaws, and everyone has equal input into how the cooperative is run. In order for a co-op to be successful, members must be active participants, and everyone must take a stake in ownership.
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