There are a few different types of business structures. Each business structure offers certain advantages and disadvantages in legal control, taxes, and liability. If you are creating a business, be familiar with the advantages and disadvantages of the entity you are utilizing.
Also known as Sole Traders. Sole proprietorships consist of ownership by an individual party, which takes on all the risks of business, including debt and legal liability. If any problems arise, the sole proprietor will be held responsible. There is no legal distinction between the sole proprietor and the business the proprietor owns. However, the sole proprietor also maintains full control over the business and takes in all the profit after expenses.
A corporation is a legal entity distinct and apart from the corporation’s owners, referred to as shareholders and managers, known as directors and officers. A corporation may enter into contracts, sell and buy property, and be sued. Corporations can only be created by state statute and to form a corporation, strict guidelines must be adhered. The guidelines are defined by each state’s statutes that cover corporate governance. The shareholders (owners) of a corporation are not responsible (in most instances) for corporate debt. Corporations can be divided into two types: C corporations and S corporations. The main distinction between the two types is that C corporations are taxed separately from their owners while S corporations are not. Instead, the owners pay for the corporation’s taxes on an individual basis. S corporations are subject to eligibility requirements which C corporations are exempt from. Such requirements include, but are not limited to, the number of shareholders, the class of stock and the residency status of the shareholders.
Limited Liability Companies
A Limited Liability Company (LLC) is generally defined as a business entity consisting of one or more persons. An LLC, like a corporation, has limited liability under the law. However, limited liability companies are not held to the same strict management requirements as corporations are. In fact LLCs are a legal entity created only by state law. Limited liability companies have managers, members and often employees. The management of the business is by the owners (members) of the LLC.
LLCs, like corporations, are separate legal entities from their owners. They also have a choice in taxing structure which comes from being a hybrid of other entities; LLCs can choose to file taxes as corporations or partnerships. An LLC’s structure is usually less defined then a corporation, making investors wary of supporting them too much.
Generally a limited partnership consists of one or more limited partners and one or more general partners. The role of the general partners is to make the management decisions of the business, while that of the limited partners is limited to providing capital and taking profits as investors. However, 100% of the risk is assumed by the general partners, who also assume all debts and any liabilities and of the limited partnership. Conversely, the limited partners only risk their financial contributions made to the limited partnership. In most cases, all partners in a limited partnership share the profits of the business.