Posted by : Amanda Stein Wednesday, January 9, 2013
There are many factors to be considered and decisions that need to be made when starting a business; however, arguably the most important is deciding what type of business you want to form and which type will be best for your business goals. Making this decision will significantly impact your business and its success (or not) in the future. Thus, not only is it something that you want to consider in-depth, but it is also something about which you want to be as informed as possible.
Choosing which type of business to form can be somewhat complicated, not to mention stressful, for a new business owner as there are a variety of factors that differentiate different business entities from each other, each having a dramatic impact on how your business will be run. Depending on the unique aspects of the business you want to form, you may find that one of the following business entities is a great fit for your future goals:
- Sole Proprietorship – this form of business includes any unincorporated business that is owned by one person only. These are typically the easiest of the businesses to form and operate; however, the owner is considered liable for any debts and claims made against the business. Additionally, the owner cannot sell interests (stocks) in the business in order to raise money.
- Limited Liability Company (LLC) – this form of business is considered a mixture of corporations and partnerships, as the owners (typically called members) are not considered liable for the business’s debts or other liabilities. While the regulations regarding these types of businesses vary from state to state, members can typically be individuals, corporations, or even other LLCs.
- Corporation – this form of business is made of a group of members, called shareholders, who own certain percentages of the company and make decisions regarding who runs the company and how it is run. This is beneficial in that it allows the company to exist regardless of whether or not the original owner is still alive or involved and to more easily raise capital as shares in the business can always be sold. Additionally, shareholders are not considered personally liable for the company’s debts, liabilities, or other responsibilities. However, because shareholders earn profits based on the percentage of the business they own and they are taxed on these earnings, a corporation is considered to be double taxed, as it is also directly taxed on any earnings.
- Partnership – this form of company is run by two or more people and is very similar to a sole proprietorship in that the owners are considered liable for any debts or claims involving the company. However, they also earn all profits made from the company and are taxed less.
- S Corporation – this form of business is very similar to a corporation, except that all shareholders are considered liable for both the profits and debts or liabilities of the company. In order to form such a business, the company must have 100 or fewer shareholders who are American citizens, trusts, or estates (excepting companies) and be based in the U.S.Although deciding which of the above main types of business structures will best suit your new business can be frustrating and overwhelming, evaluating each of the factors that separates these structures from each other will give you a better understanding of each and hopefully allow you to make an informed decision that will be best for your company's future.
Author Bio: Nancy Tran is a regular contributor to many business, professional, and tech blogs that are geared towards helping people and companies navigate the business world. Additionally, she is interested in helping individuals and businesses alike receive the legal guidance they need that a business lawyer can provide.