Different Types of Companies and Their Advantages
The different types of companies and their advantages will need to be researched when starting a business and deciding what business entity you want.3 min read
2. Sole Proprietorship
3. General Partnership
The different types of companies and their advantages will need to be researched when starting a business. You'll need to decide if you want a partnership, sole proprietorship, corporation, limited liability company, or non-profit. What kind of business structure you choose depends on what the company's goal is, what the nature of the organization is, and more. Every legal structure has its own advantages and disadvantages, so it's good to eliminate the ones that won't fit with your business to make your choice easier. We've detailed two of the simplest forms of business entities below.
Deciding Which Type of Business Entity is Right for You
There are several issues to think about when deciding this, including the following:
- Is it easy to get set up and begin operating?
- What are the advantages and disadvantages for taxes?
- Are there any possible legal liabilities?
- Will liquidating the business be easy?
- Will more equity capital be raised as the company grows?
- Is much record keeping necessary?
- Are there complicated regulations to keep the business active?
- What happens if the owner dies?
What type of business structure you choose depends on what you want your company to look like. If the business consists of only you, a sole proprietorship might be a good choice. However, if you're worried about risking your personal assets, taxes, or personal liability, you may feel more comfortable with a C or S corporation or an LLC.
The easiest type of business structure to begin with is a sole proprietorship. If you're the only owner when you start a new business, your company will automatically be a sole proprietorship according to the law. You won't need to register this through the state, although you may need local business licenses or permits according to what industry you're in. If you're not worried about personal liability, this is a good choice. The proprietorship and the owner are the same from a legal standpoint.
Consultants, freelancers, and other service professionals often work as sole proprietors, but it's also a good option for businesses that are more established, such as retail stores with only one person working. There are several advantages, including:
- easy to form and maintain
- legally the owner and business are the same entity
- no fees to form this business entity
- the owner can deduct their net business loss out of their personal income taxes
- no paperwork is required
- profits are only taxed on owner's tax returns
- one person makes all business decisions
- taxes are simple, only needing a Schedule C-Profit or Loss From Business form attached to owner's personal tax return
However, there are some disadvantages to having a sole proprietorship as well. The owner is liable personally for any judgments, debts, or other liabilities of the business. They are required to pay personal income tax for any net business profits. The owner may also be exposed to endless legal liabilities and will need to pay back business debts personally. If they can't, the creditors might take some of their personal assets. When going into a lawsuit, their car, home, and other assets are at risk. It's also harder to borrow money.
Similar to a sole proprietorship, a general partnership is the default for businesses with multiple owners and does not need to be registered with the state. There are three parts to a general partnership: sharing the ownership of the business jointly, sharing any profits or losses, and having an equal right when it comes to managing the business.
These kind of partnerships are easy to form and maintain, and it doesn't cost anything to form this type of business entity. The owners can report what their share of any business losses are on their personal income taxes. A partnership can bring people with different talents together to run a business. If the agreement allows it, the partnership could continue even if a partner dies. Businesses who are a partnership don't need to pay income tax, as every partner will file the losses or profits of their business on their own tax return.
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