what are the 4 types of business?
There are many decisions to be made when starting a business and yes, one of the most important is the type of property you choose (legal entity).
This topic causes many people to have sleepless nights and, if you make a mistake, it can hurt you financially and emotionally!
So is it confusing? No, to be honest, it’s not.
Then why all the sleepless nights? Because people like it.
That makes this post different.
We have been where you are now, founded and operated sole proprietorships, partnerships and LLCs. And from a family of accountants (disclaimer – I’m not an accountant, I own a small and medium business), I spent years on both sides of the fence.
Together, we will analyze the four types of enterprise ownership, what each means, their advantages and disadvantages, and without confusing legal terminology and professional jargon.
But before we get to the heart of the matter, we need to talk about registering a company and why it matters.
Business registration: a simple explanation
To trade legally, you must first register your company with your local, state, or federal government so that your quiet partner (the government) can get the piece of the pie for a fee.
You have four options; they are all very different and which one you choose depends entirely on the circumstances and aspirations of your business.
Your choices will greatly affect how you run your business, including start-up costs, personal liability, and how you file taxes. But most importantly, how much will it cost to set up and run a business for all new business owners. what are the 4 types of business?
Quite simple, indeed!
If you go it alone and are willing to make a legal commitment (the reward outweighs the risk), then this is the option for you.
Individual entrepreneurship is the most popular form of ownership of small and medium enterprises due to its ease of creation. All you need to become legal is the necessary permits and licenses (each state has its own requirements) and the funds to start trading.
Choose your company name
Register a Doing Business Like database administrator with local and state authorities.
Sign up for a business license
Obtain the necessary permits and licenses
Request an EIN (usually required only when hiring employees)
Get the right insurance
With regard to insurance, the most significant risk of trading as a sole proprietor is litigation; if someone sues you, your property will be in danger. Before registering, consider the following insurance options: property and liability insurance, auto insurance, health and disability insurance.
You are the boss: every decision is yours
Easy to set up: there are no complicated forms for submitting documents
Simplified taxation process: no double taxation
Low accounting costs: a good accountant is more than enough
Low tax rates
No balance requirements:
Personal liability: because there is no legal difference between you and the company in case of bankruptcy, you can do it!
Financing: banks are less likely to lend to individuals.
Public opinion: Depending on your business, some clients choose to work with an LLC.
Doing business alone can be difficult
Partnerships also represent a significant share of the SME business world. But before moving directly to a single adage, “power is in numbers, but even more so with collective goodwill.”
If you and your friend have a business idea, then a complete partnership is the easiest option. The initial registration and ongoing tax debts are more complex than a single property, but with the confidence that you know you are not alone in business. This is where digital power comes in.
Creating a complete partnership:
Partnerships can be formed between two people, separate organizations or both. Responsibilities can be shared equally or you can take a more flexible approach, for example (one partner’s skill set might correspond to online sales and advertising, and another might be better suited for day-to-day work, inventory, business services). customers, book management, etc.) …
Select your company name
Register with local, state and, if necessary, federal authorities.
Get all the necessary permits and licenses.
Establish your tax obligations and request registration
Apply for the EIN partnership
If you form a partnership with another company, then all legal issues related to control, what percentage and last word, must be agreed before registration. This will help minimize any potential problems in the future.
However, if you are going to partner with someone, tell a friend or family member, proceed with caution because you do not want a business conflict to ruin the relationship. To establish a successful partnership, you need to know each other’s skills, respect them, and allow both parties to do their job properly. And there is “collective goodwill”!
Flexibility: tasks can be divided
Reduced liability: the more people involved, the less risk you take if something goes wrong.
Increasing resources: both sides of the partnership bring resources to the business.
Taxation: double taxation does not apply in connection with the so-called excise tax, applied only to a single legal person. Individual partners pay taxes at their tax rate and any losses incurred by the full partnership can be deducted from each member’s other sources of income.
Unlimited liability: as a general partnership, all partners are personally liable for debts and any other obligations.
Conflict: Yes, unfortunately, where there is partnership, there are disagreements.
The bottom line is that you need to believe in each other and keep that faith – a clear and concise agreement.
Limited Liability Company (LLC)
There are benefits to setting up a limited liability company, but there are responsibilities associated with those benefits.
So what is the reimbursement for the additional liability associated with setting up and running an LLC?
Let me tell you:
A limited liability company is a hybrid between a partnership and a corporation that aims to offer owners the best of both worlds. You get the flexibility of the partnership, but with a separate corporate entity (which limits your liability) in case of debt or legal action, and if you have a good accountant and the right documentation, you can avoid (at any cost!) Being taxed as a corporation.
The rules for creating an LLC will depend on the state in which you trade; however, the requirements are the same. You do not need legal advice to create it, but if the LLC has more than one owner or investor, it is recommended that you do so.
Members of an LLC may be optionally treated as a partnership or corporation S for income tax purposes, and individual LLCs may be optionally treated as a sole proprietor.
Another tax advantage of LLCs is the pass-through tax regime that avoids double tax payments by C corporations.
Limited liability: You have a higher level of financial protection if the company has debts or is facing legal action. Note (as an LLC owner, you may be liable for any debts if you act as guarantor for financing)
Flexibility: all the advantages of a corporation and the flexibility of the partnership
Public Opinion: LLC is often valued more than the sole owner; therefore, customers may be more inclined to work with an LLC.
Taxation: LLCs may be treated as sole proprietorships or partnerships by the IRS at their discretion, avoiding corporate taxes and complex corporate forms.
Initial registration: In order to officially form an LLC, you must submit an “Organization” to the Secretary of State.
Application fees and setup costs: The fees and costs of registering an LLC vary by state and can range from $ 100 to $ 1,000.
Minimum Annual Tax: Some states require you to pay a minimum annual tax, regardless of your earnings, in California for $ 800.
LLC Operating Agreement: When you register an LLC, you must provide a detailed “operating agreement” that contains information about the governance structure, finances, rights and responsibilities.
Annual Filing of Statements: Almost all states require an LLC to file an annual statement, and failure to comply with it can lead to delays, fines, suspension and even dissolution of the LLC. what are the 4 types of business?
Apple, Amazon, BP, Coca-Cola, Walmart and Alphabet Inc (Google for you and me) are corporations.
Most of the largest and most influential companies in the world are like this because of the many advantages that a corporation offers.
Corporations are legal entities separate from their owners, shareholders.
These are often called “legal entities” because corporations have most of the rights and responsibilities that people have: that is. they can borrow money, enter into contracts, hire employees, hold assets, sue, sue and pay taxes.
Corporations have limited liability, which means that shareholders can benefit from equity gains and dividends without incurring liability for the company’s debts or litigation.
There are many different forms of corporations, such as non-profit organizations, C Corporation, S Corporation, government corporations, professional corporations, private corporations. Anyone can trade under a separate corporate name or brand name (for example, Alphabet Inc trades on behalf of Google).
Creating the corporation:
The process varies from state to state, but no matter where you live or trade, you must submit a “memorandum of association” and issue shares to shareholders. The number of shareholders can also vary from one person to a thousand.
The incorporation process, commitments and multiple conditions make corporate training a complex and costly process that often requires a large team of professional lawyers. Taxation can be extremely burdensome and you can be taxed twice: first on your business income and then on your personal income. Corporations are governed by the corporate laws of their country of residence.
Shareholders are legally responsible, so all personal property is safe.
The corporation can sell shares and raise financial capital.
Professionally managed structure, with defined roles and agendas.
Employees can buy shares at a fixed price and receive payments in the form of stock incentives.
what are the 4 types of business?
Listing a corporation is a costly and time consuming process.
You will have limited flexibility due to the heavy weight of the rules.
Double taxation (both corporate taxes and dividends paid by homeowners are taxed).
Over to you
You see, I told you this is not confusing.
Your first step is to decide what type of company ownership structure is right for your business, submit the necessary documents, and then obtain the correct licenses and permits.
Here’s a breakdown to help you make the right decision and avoid sleepless nights:
Single ownership is an excellent choice for aspiring business owners, those who work alone, lack capital or trade-in a low-risk business sector, but can afford the insurance they need. what are the 4 types of business?
If you are another person with the same thoughts, with the skills needed to turn an idea into reality, then partnerships are a great way.
LLC is an excellent choice for those who want the company to maintain public perception, be able to hire employees, and want to maintain the flexibility of the partnership / sole proprietor while remaining a separate legal entity.
If you plan to create a large company that could raise capital by selling shares and you have the resources to run it, the corporation is a stable foundation for long-term growth.
Read more related to “what are the 4 types of business?” on Forbes Magazine