Do you want to create your own business but do not know what type of structure would be best? You are on the right page. You have to figure out what type of organization you want to establish since you have multiple choices. But it must be aligned with your company’s goals, vision, mission and practices since this will directly affect your firm’s overall success. Hence, understanding the advantages and disadvantages of different forms of organizations is a significant step before deciding what kind of structure you should pursue. The primary forms of business structures are single proprietorship, partnership, corporation and limited liability company. Each category differs in terms of capital requirements, tax obligations, cost of operations, formation and liabilities. For better understanding, read the information below.
1. Single or Sole Proprietorship
This is the most typical type of business especially for individual entrepreneurs. They establish an enterprise using their own funds or borrowed from another party. Single business owners aim to get personal benefits from the business such as a higher income just for his or her own gain. Every decision will depend on the owner such as its operational activities and length of existence. Once the owner decides to stop running it, the business will immediately die.
- All profits will be the owner’s income
- It is easy to establish since it requires minimum amount of cash and space to place the business
- The owner is the boss who handles everything that can be managed in flexible manner
- Registering it in municipality or community is the only requirement
- Unlimited liability for the owner
- Equity will depend on the owner capacity to provide resources that is commonly limited
- The format of ownership is not easy to transfer
- The business has the same identity as the owner. Hence he or she will be liable on everything it offers to the public
This is the meeting of minds of two or more people that have the same business goals and objectives. It commonly consists of two types of partnership and the first is General Partnership. Here, both owners or managing partners are involved in the daily operations and they are required to contribute both cash and property. All partners have unlimited liabilities and responsibilities.
The second one is the Limited Partnership that needs a formal contract to form their agreement. It should contain all partners agreed contributions, liabilities, income, labor and other terms regarding their partnership. But this type of business limits the owners for its potential risks and liabilities depending on the level of their contributions.
- Combined financial and property resources expand partnerships’ the scope and power
- All parties share the revenue with each other and received corresponding portion
- It also provide flexibility to owners
- The cost of formation is not costly unlike other types of business structures
- Every partner is liable to business debts and net losses
- Can be conflicting when conducting decision making
- Selling the business is challenging since a partner must seek another partner again
- If any of the partner died or decided to stop running it, the business will probably end
Corporations have a distinct identity from its owner called President or Chief Executive Officer. It is to protect them from taxes, liabilities and losses. The income earned by a corporation is an actual earnings of the firm and not by the ones who run it and it is being taxed. Then, the dividends or profits shared with stockholders or shareholders that own a portion of shares are personal income of the owners that is also subjected to taxes. They build corporations for the purpose of acquiring large investment opportunities, market shares and capacity to operate.
- Separate identity of the corporation from the owners that protects them from major liabilities due to net losses
- Can easily transfer to different owners
- The owner’s personal assets and properties cannot be collected to pay for their financial obligations
- Expensive start-up costs in operation and establishing
- Complicated legal forms and registration have to be done
- Double taxation of income
4. Limited Liability Company (LLC)
This type of company has limited liabilities as the name suggests. More importantly, this is a hybrid version of partnerships and corporations that lightens its overall disadvantages. If you wanted to establish an LLC type of business like becoming a real estate investor and create your acquisitions team. This might suit your goals and objectives. For instance, if your team is looking for an individual to sell a house fast in Chattanooga, you can set the strategic plan and your team will help you to conduct it.
- Limited owners’ financial obligations
- The income of LLC and owners are not subjected to double taxation
- This type of organization is not available in all states or countries
- This will require higher start-up cost, complex legal forms and processes