Types of Business Structures

Author : Gray Mike

Whenever an individual decide to start a business, knowing about various types of business structures becomes an important factor to consider. BY educate one’s self leads to an informed decision. It is important to know the advantages and disadvantages of all business structures. When setting up a company, one must choose the type of company that suits the financial condition and expansion vision of the initiator. Below are basic information on major business structures in the US, along with a few advantages and disadvantages.

Sole Proprietorship
Sole proprietorship is probably one of the simplest, most uncomplicated types of business structure there is. This type of business structure has a single person who owns and controls the company. The business owner will ensure smooth business operations of the entire company. However, he or she is accountable for any profit or loss the business makes. Sole proprietorship do not require a lot of money to form and the dissolution procedure is very quick and easy. However, when the business owner dies, the business organization will cease to exist. This type of business structure is best for business owners who are experts in certain fields and want to profit off their talents.

Partnership
Essentially, partnership firms may be formed between two or more people. The members are called as partners and are joint owners of the entire company. When setting up a company under partnership, know that the partners are accountable for any profits, loss and liability of the business organization. One notable feature of partnership is the pre-defined agreement regarding profit sharing and loss bearing. Partnership is very similar to sole proprietorship in terms of ease and simplicity of setting up a company but the entire taxation policy and obligations are somewhat complex. However, there is no specific tax for the partnership company.

Dissolution of a partnership firm will occur when a partner files for bankruptcy, dies or through a mutual decision between partners. Setting up a company under partnership requires understanding of the financial obligations and agreement between partners.

Limited Liability Company (LLC)
Limited Liability Company is one of the newer types of business structure there is. A limited liability company is a combination of a corporation and partnership. It provides flexibility by blending benefits of both corporation and partnership business structures. Just like a partnership firm, forming an LLC is relatively simple. The tax obligations of Limited Liability Company are also similar to a partnership firm. However, during the formation phase, members should take care not to include more than two features of a business corporation in the agreement otherwise; the LLC will be treated more like a business corporation for taxing purposes. The best advantage of Limited Liability Company is that provides flexibility that it can formed to run different business ventures.

Corporation
A corporation is the most complex type of business structure that requires extensive documentation, legal formalities and money to form. Note that when a business corporation is incorporated and registered with the government, a new separate entity is then, created. This entity is distinct from the business owners. The shareholders will determine the board of directors through an election. The elected board of directors will form all the necessary policies, rules and guidelines for the proper functioning of the company. The directors appoint managers and officers and they control the daily business operation of the company.

Setting up a company under this type of business structure requires various legal formalities like approvals and meetings. It is important to note that there are four types of corporations to choose from:

- General Corporation
- Close Corporation
- S Corporation
- Non-Profit Corporation

The basics among these corporations are essentially the same. They only differ in terms of the number of shareholders and profit sharing policies. Corporations come with certain advantages. The most crucial is the fact that corporations are treated as separate from the owners and their personal liabilities. However, when setting up a company, it is important to note that corporations will take much time, money and legal formalities.

Choosing the right business structure for your company will help you gain all the advantages each can bring. However, just like anything in life, there are certain drawbacks to consider as well. It is important to educate yourself with all the information you can find before you make any decision. Consider all the pros and cons. It is also advisable to consult with your accountant and your attorney, and deliberate which type of business structure is the most advantageous.

The author is a writer for http://settingupacompany.org, a site specifically created to provide valuable information focused on setting up a company.