What are the Advantages of a Company Form of Business?
The advantages of company form of business are determined by the type of company you form, but you could enjoy several advantages, such as limited liability.3 min read
The advantages of company form of business are determined by the type of company you form, but you could enjoy up to six basic advantages, such as limited liability.
What You Should Consider Before Creating a Business
When you are forming a business, you will first have to consider what type of structure it should have. Consider the following:
- The rights and legal liabilities of those who take part in the business
- Who controls the business and the level of control you want to have
- How complex you want the company's structure to be
- The lifespan of the business
- The finances, including taxes, debt, and liabilities
The Types of Business You Can Create
Your above considerations will determine the type of business you'll create, but you should probably get legal advice on the best type of company for your situation. Following is an overview of the types of businesses you could form:
- Sole proprietorship: In a sole proprietorship, the owner and the business are legally one and the same. This is one of the easiest ways to start a business and the most common type of business.
- Partnership: Like a sole proprietorship, a partnership is easy to create, but it involves two or more people.
- General partnership: In this type of setup, participants may equally divide the profits and losses and shoulder the liability, unless a written agreement specifies how these things are to be shared.
- Limited partnership: The partners each have limited liability, which only extends to their level of investment in the company.
- Limited liability partnership: These types of businesses usually involve certain professionals, like lawyers, physicians, and accountants. Like any partnership, members report their share in the loss or profit on their income taxes, but they are liable for malpractice.
- Professional corporation: In this type of business, owners are not personally liable for debts, but they are liable for any damages they cause.
- C corporation: This type of business is a separate tax and legal entity from the people who created it. The shareholders provide money and/or property to the business; in turn, they receive a share of the company's capital.
- S corporation: This type of business can avoid some corporate income taxes while enjoying the limited liability of corporations.
- Nonprofit corporation: A nonprofit does not have to pay any income taxes for funds it receives for charitable purposes. Some benefits a nonprofit receives can be deducted if categorized as business expenses.
- Limited liability company (LLC): This is a hybrid of a corporation and partnership. Also, the lifespan of the company is limited, but it can be expanded by a vote.
- Professional limited liability company: In this type of company, a state licensed professional can run a business like an LLC.
The Advantages of a Company Form of Business
If you opt to form a corporation or an LLC, there are six types of advantages of a company form of business, based on the type of company you create:
- Limited liability: In a limited liability company, the main risk shareholders have is connected to the value of their shares that they hold or were promised.
- Perpetual existence: When a corporation has a perpetual existence, it can still exist regardless of what happens to its founders or shareholders. That is because the company is considered a separate entity and its ownership can change hands.
- Professional management: This type of management for a business involves directors who are elected by shareholders and have a lot of experience running companies. The directors then hire professional managers, who are in turn responsible for overseeing the day-to-day operations of the business.
- Expansion potential: In a public limited company, there is no limit on the number of shareholders. Companies can expand by offering new shares and use their reserves to expand further.
- The ability to transfer shares: Shareholders can sell their shares for any reason, especially if the company is not as profitable as they'd hoped. Even though shares are changing hands, the business will continue to run.
- Sharing the risk: The whole risk of the business is shared among shareholders based on their number of shares. This is an advantage, especially for small investors.
If you need help weighing the advantages of a company form of business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.