Are you someone who is planning to start a new business right from scratch or a person who is looking out to purchase one of the existing successful businesses? If your answer is yes for either of the two options. Then before taking any further steps, it is really important for you to know about the kind of businesses and incorporations which exist in this world.
This is because, unless you know the various types of businesses out there, it would be almost next to impossible for you to decide which company type suits you the best which will ultimately lead you to get confused and spilling the situation out of hand.
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There are a number of business types available out there in the market, but if we can divide them broadly then there are two major categories that are unincorporated business structures and incorporated business structures.
These two heads are further divided down into many subparts. If you want to know more about these business structures and wish to have a basic idea about them, then you have arrived at the right place. Here we have tried to accommodate almost all the varying types of businesses and incorporations in our article. So, wait no more and continue reading to know more about this vast world of business.
This is a type of Unincorporated Business Structures in which one the business is in one of the most basic business structures and there is only one individual who is the owner of that business. The size of the business can vary from being as small as a simple corner market or as big as a large warehouse.
Its simplicity makes it one of the easiest business types, but it is also due to its extremely simple structure wherein there is no ‘separate legal entity’ status for the business, that leaves the single owner directly vulnerable to liability as he or she is solely responsible in case of any debt or tax liability. In order words, in case of any unfavorable scenario like a financial problem, legal or tax liability, the owner’s business as well as his personal assets would be in a state of jeopardy.
This is another kind of Unincorporated Business Structure where there is more than one individual involved in the position of the owner of the business or enterprising venture. In this partnership, the partners can be corporations, individuals or trusts and the ownership including the total income as well as the debt and liability will be shared among the partners. Though partnership allows easy launching of business as assets are pooled in together for the profit of the business but it also has a downside.
For instance, since all the partners are the direct owners of the business or venture, then they are directly liable in case of any tax or financial liabilities, debts incurred and losses experienced which arise from the partnership. Moreover, this liability is not only limited to the financial aspect but also extends for any action committed by another partner, exposing them to lawsuits. In comparison to a sole proprietorship, there are some tax advantages in a partnership but they are not that significant as in the case of properly organized incorporated business structures.
This is a type of Incorporated Business Structures wherein two or more parties form a legal entity between them by each contributing equity, in order to undertake economic activity together as well as to share revenues, expenses, and control of the business enterprise.
This joint venture, depending upon the parties involved can either be limited for just one specific project or can be extended for a continuing business relationship, just like the Sony Ericsson joint venture.
Comprising of one or more general partners and one or more limited partners who form a separate legal entity, a limited partnership is a type of Incorporated Business Structure. Though this arrangement is more or less similar to a general partnership in this, you can be saved from the separate and limited status of the limited partners.
The main motto of this partnership is to prevent liability and gain the ability to distribute funds among several shareholders in the form of dividends. Which would not have been possible under the circumstances of a standard corporation.
While the general partners are responsible for the day to day operations of the company, they are personally liable in case of any debts or obligations. The limited partners are only restricted to invest capital in the company and not take part in its daily operation, however, in case the company gets sued, their liability is limited in proportion to the capital that they invested.
Limited Liability Company
In this Incorporated Business Organisation Structure of LLC or Limited Liability Company, the members involved are allowed some favorable tax treatments and also personal liability protection. However, one must keep in mind that it is crucial to consider the state laws of the place where the LLC will be formed as the specific structure as well as the status of it can vary from one state to the other.
The multiple owners or the members and also the Managing Member who is usually the figurehead of the business responsible for its efficient management, are allowed to enjoy limited liability in the LLC business structure model. Through the personal income tax returns of the members, the profits or losses of the business are directly passed.
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A type of Incorporated Business Structure, C corporation or the traditional corporation creates a new, legal and separate entity which is distinct from the owner(s) and can engage in businesses, enter legal commitments, acquire property and assets, have its own bank accounts and even establish its own credit identity. One of the major advantages of this business organization structure is that since it is a separate entity, shareholders or the owners of the corporation can enjoy limited liability protection.
Which in other words mean that their personal assets are protected from any liability incurred by the corporation. And also that they are not personally liable in case of any legal liabilities against the corporation. The extent of their loss will depend upon the amount they have invested in the corporation. This business organization structure can prove to be extremely advantageous for the sole proprietor. Moreover, since there are several tax and fringe benefits enticements in this corporation which makes it an ideal business organization structure.
Limited to 100 shareholders in most of the states, this incorporated business structure complies with subchapter S of the Internal Revenue Code. It provides limited liability of the standard corporation and also combines it with the pass-through taxation of a partnership. If an existing corporation wants to apply for S status, then they have to do so 2 months and 16 days before the end of their fiscal year.
In other words, the shareholders can avoid the drawbacks of double taxation and at the same time also enjoy the limited liability protection of a Corporation. There are several other eligibility requirements as well which you must meet in order to get this status, so please research well and gather all the information as well as documents beforehand.
This incorporated business structure is formed by those individuals or groups of individuals who otherwise would not have been eligible for corporate formation, including professionals such as doctors, engineers, lawyers, accountants, etc and so on.
However, such a group must be formed with the motive of providing professional services and must comprise of only those professionals who are licensed to practice their specific profession. This corporation is also known to provide more or less the same tax benefits and liability shields as provided by the traditional corporations.
Non – Profit Corporation
Designed in order to perform activities and enter transactions without the traditional motive of generating profits, a Non – Profit Corporation is also an incorporated business organization structure which provides for most of the shields from liabilities to its shareholders as provided in a traditional Corporation. Though opposite to the name, but this non – profit corporation can also generate profits.
However, that profit must not be its primary aim and also the profits thus generated must be further used in the non – profit business goals of the same non – profit corporation. One must also remember that in this non – profit corporation, neither capital distributions nor the dividends are paid to the shareholders.
Now that you have read about these various types of business and incorporation, you must understand one thing very well that every company type has its own set of advantages as well as disadvantages. So, if you have been expecting a specific golden business type which was ideal in every sense and you could just eat sweet fruits of profits and face no drawbacks or hardships, then we are sorry to burst your bubble of happiness.
Therefore, it is a must that in this practical world, you need to be extremely careful of the kind of business you choose so that you can successfully avoid any later confusion or doubt in the future. We hope that this article was helpful to you!