Which Business Types Are Easy to Form
If you are wondering which business types are easy to form, you first need to understand the different types of business structures.3 min read
If you are wondering which business types are easy to form, you first need to understand the different types of business structures. By choosing the right structure, you can decrease your personal liability, stay compliant with laws and regulations, lower your tax burden, and receive access to certain types of pertinent funding.
What Is a Sole Proprietorship?
One type of business structure is called a sole proprietorship. You can form this type of business if you are the only owner. It means you are responsible for the management of the company as well as its debts. If you have not formed a legal structure, but you conduct business as a contractor or a freelancer, this means, in the eyes of the law, you are considered as a sole proprietor.
It's important to understand that a sole proprietorship is not a separate legal entity from its owner. Also, any and all applicable permit laws and licenses must be obtained. There are many advantages to operating as a sole proprietor. First, you can combine your business and personal assets. This type of business structure is simple to set up and tends to be fairly inexpensive to operate.
Any income that you earn as a sole proprietor can be offset by your income as well as any losses that you take on. Furthermore, you will have complete authority when it comes to making choices that impact your business. If you need to dissolve, the process is simple.
As with any other type of business structure, a sole proprietorship has its disadvantages. One of the cons of this type of business is that the owner cannot sell an equity stake in an attempt to raise capital.
It's also worth noting that any of the debt that the business accrues is the sole responsibility of the owner. Since ownership of the business can't be shared, it makes it difficult to hire quality staff members. Health insurance premiums do not qualify as a business expense. It is because of these reasons that many sole proprietors choose to incorporate their companies into a legal structure.
What Is a Partnership?
Another type of business structure is a partnership. This type of business is formed when two or more individuals start a company with the intention to earn a profit. A legal document is not required to start a partnership, but it is highly advised to protect all parties involved.
Regardless of whether or not an agreement is created, all business partners should come together to discuss various aspects of the company, including:
- A business plan.
- How much each partner is expected to contribute.
- The type of profit and loss distribution plan to be put in place.
- The management and hiring process.
- An exit strategy.
- An internal disagreement resolution plan.
Like a sole proprietorship, a partnership has several advantages and disadvantages. Partnerships are simple to set up. Hiring employees tends to be much easier because the new staff members can be offered a share of the company. The taxation on this type of structure is simple because it is considered a pass-through entity; this means each partner has to pay taxes according to the amount they receive in distributions.
A disadvantage of this type of business structure is that each partner is responsible for the debts and liabilities of the business. Also, any profits that are made must be shared among the partners. More so, each partner is responsible for the actions of the other partners, which, many times, leads to disagreements.
What Is a Limited Liability Partnership?
Some partnerships choose to incorporate themselves as limited liability companies, also commonly referred to as LLCs. When doing this, the partners reduce their individual risk by not being responsible for the actions of the other partners. This type of business structure is especially advantageous because switching from a regular partnership to an LLC does not significantly impact the daily activities of the company.
When an LLC is created, its owners are commonly referred to as members. If you want to set up an LLC, you will need to:
- Pick a business name.
- File articles of organization. https://www.forbes.com/sites/allbusiness/2017/01/18
- Pay a filing fee.
- Create an operating agreement.
- Obtain licenses and permits.
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