Types of Businesses
Going into business for yourself can be a scary venture, and if you are going into business you will want to make sure you are protected. Here is a small list of business partnerships that you can form. Knowing what each type of partnership is and how they work will allow you to find the right one for you.
- Limited Partnership
- Sole proprietorship
These business types differ in a few ways, some allow for only one owner, whereas others allow for multiple owners even as high as several thousand or more.
Deciding what is the right business for you shouldn’t be terribly difficult, but you will have to make a few decisions before forming your business.
- Will you be the sole owner, or have partners/investors?
- Is this business something that you may want to make public at any point?
- The appropriate tax questions that need to be answered.
- Will the formation of your business allow your personal assets to be protected?
- What’s the division of ownership?
- How many employees do you plan to hire?
Once you have answered these questions, and any others that may come up while answering these, You will have an idea of what type of business that you will need to form. If you are able to, you may want to speak with a lawyer or accountant.
If you chose to form one of these types of corporations, but you want to file yourself than you may want to check out LawDepot.com. They may also be able to answer question that you may have that I didn’t answer for you in this article.
A C-Corporation suffers from double taxation due to its structure, and that is one of the largest negatives about C-Corps. That means the company itself is taxed and that the shareholders pay taxes on the dividends that they earn. However, the company can reinvest money back into the company at a lower corporate tax rate.
C-Corps have a board of directors that handle the larger decisions for the company. Managers handle the day to day of the company, and shareholders benefit when the business is profitable. C-Corps allow protection for its investors, managers, shareholders, directors, employees, and officers by protecting their personal assets from corporate assets.
If you want to take the company public at any point you will want to use this business structure. The amount of shares the company releases is at their discretion, but the value of those shares is based on companies over all value.
C-Corps are allowed to offer their stocks on the stock market. The valuation of the stocks when the company goes public will be determined by the worth of the company at the time, but will allow the company to generate large amounts of revenue.
The Securities and Exchange Commission (SEC) plays a direct role in issuing stocks to the market. They police C-Corps to ensure there isn’t anything illicit or illegal happening such as insider trading or corporate espionage. The SEC’s regulations are very strict when it comes to any type of corporations.
That generated revenue from selling stocks or bonds can be used by the company to work on future endeavors, projects, or expanding their business holdings.
Like the C-Corp the S-Corporation has shareholders, but they are limited to 100 shareholders. They don’t suffer from the double taxation as all the taxes are trickled down to the individual shareholders.
S-Corps also allow for the protection of the shareholders and employees personal assets. Also, a shareholder can be an employee of the company.
There are a few disadvantages to an S-Corp. The IRS scrutinizes S-Corps when it comes to salaries, so the reporting must be accurate. It is also required to pay reasonable salaries to shareholder-employees. There is an increased cost to filling articles of incorporation with the Secretary of state.
Limited Liability Corporation (LLC.)
If you are starting a new simple business with limited partners this may be your safest bet for the company.
In my opinion LLC.s are the safest bet if you are going into business completely by yourself or you’re creating a family business. It allows you the protection aspect from being sued either you or your business. Being taxed only once is also a nice feature.
In a general partnership all participants share the liability of the company, for example if one of the partners is sued that all partners are liable for that suit. It is best to define the roles of each partner through a written agreement when starting the business so if something does come down the pipe, the rules of the partnership have already been decided.
There are different types of partnerships such as General Partnerships (GP), Limited Liability Partnerships (LLP), Limited Partnership (LP), and Limited Liability Limited Partnership (LLLP).
In a General Partnership (GP) all parties share the financial and legal responsibilities for the business. In a Limited Liability Partnership (LLP) there must be a primary individual responsible for the day to day, and it can account for a silent partner that isn’t involved in the day to day operations of the business.
Limited Liability Limited Partnerships (LLLP) are relatively rare and new, but they offer more protection to the individual partners of the company.
The end all be all of starting your own business. As a sole proprietor you are responsible for everything when it comes to the company. You are responsible for the day-to-day, the finances, the work, everything… There is no middle man, if you need something done it is on you to do it.
As a sole proprietor you literally do everything as far a company management goes. You may have employees, but you will have to handle taxes and payroll for those employees. You are responsible for paying the business taxes, and handling the finances for the company.
Likely you will do all or most of the work for the company, and the success of the company will directly depend on you. If you decide not to work one day that that is your decision, but your company may suffer for it.
One major drawback to a sole proprietorship is that your personal assets are affected by the company, so if you are sued by someone your personal property could be at jeopardy. The adverse side of that is if you are sued personally, your business assets could be put at jeopardy.
No fun losing the things that you have worked so hard for, but some rather this route simply because it gives your business that personal touch, and your customers can feel that you are willing to put your own reputation online to make them happy about your work.
Pros and Cons
The advantage to forming a business as a C-Corp, S-Corp, LLC. LLP, or LLLP is that your personal assets are protected from your business assets. If you are personally sued that your business assets won’t be at jeopardy, and same goes for if the business is sued your personal assets will not be a jeopardy.
Of course, you may want to be mindful of the tax filings that must take place for each individual business model. Paying double taxes doesn’t sound fun at all, but your company will have a greater chance to find investors.
Sole proprietorship are good because you and only you are the boss, plus the tax advantages to that type of business model. However, as a sole proprietorship your personal and business assets are one and the same.
Picking your business partner is also a major question you have to answer for yourself. Is this person trustworthy? Will they be an asset to the company? What is his or her history like? How many partners or investors do you need?
I simply state that you would want to ask these things before you jump into business with someone, because I had to learn to ask these questions the hard way. I had a business partner that embezzled a large bit of money from the company which basically cause the company to go belly up.
If he hadn’t done that, we would likely still be in business today, and possibly have expanded our business to several more locations.
As always if you have any questions, comments, or concerns please feel free to comment below or send me an email.
All of my best to you and yours,
*Disclaimer – I am not a certified Financial Adviser, Accountant, nor am I an Attorney, So any advice given in my blogs is solely based on my opinions.*