2 min read
01 Apr

1. Sole proprietorship

A sole proprietorship is a type of business where there is no legal distinction between the business entity and its owner, so it best fits situations where the organization only has one owner. They are a popular choice for small businesses due to the low initial costs. Also, any generated income is only taxed once, as opposed to being taxed as a company and then again as a personal source of income. They are also subjected less to taxation and regulation compared to other types of businesses. However, if your business is a sole proprietorship, there is no distinction between your assets and those that belong to your company, which may be an issue if your company experiences financial challenges. Read more: What is Sole Proprietorship? Definition, Advantages and Disadvantages

2. Partnership

A partnership constitutes a formal agreement between two or more individuals who agree to run a business together. It can also be established between two or more businesses or between businesses and individuals. The partnership agreement clearly states the amount of authority, potential profits and liabilities that each partner is due. Although the partners share benefits and responsibilities, one partner's choices can potentially affect the entire company. There are two types of partnerships—general and limited. In a general partnership, all partners assume liability for the company's potential losses, debt and other obligations. In a limited partnership, some of the partners are solely investors who have no managerial control or liability. A limited partnership contains both general partners and limited partners.

3. Corporation

Corporations are companies that have been authorized to act as single entities. When a company's owner incorporates their business, they essentially separate their personal liability from that of the company. Corporations have many of the rights and responsibilities that individuals enjoy, such as owning assets, hiring employees and paying taxes. However, they are subject to state regulation, with a state-imposed board structure and taxation of both business and personal revenue. Owning a corporation is typically more flexible than other types of business, as you can transfer it in the form of stock. However, the high number of rules and regulations that a corporation must follow typically means you may have to pay higher costs for accountants and attorneys compared to other types of businesses. There are three kinds of corporations:

  • C corporations**:** These corporations are taxed as business entities, and the owners' received profits are then taxed again individually.
  • S corporations: Deriving from “small business corporation,” this type of business organization divides income and losses among its shareholders. This means that the corporation itself does not pay any income taxes, making it an effective way of avoiding double taxation.
  • Nonprofit corporations: These corporations are exempt from all taxes, but they must operate without generating a profit. A nonprofit corporation can achieve this if it invests all of its generated cash flow for expansion and future operations. This is a type of business organization that's most often used by charitable entities.

4. Limited liability company

As with corporations, limited liability companies separate the owners' liability to that of the company. They can be taxed either as corporations or as partnerships, and they can be owned by many different types of business entities, such as trusts, corporations, individuals and other LLCs. Although similar in structure to S corporations, LLCs do not put their shareholders' personal belongings at risk, separating the personal liabilities from the ones that the company generates. Also, as opposed to S corporations, there are fewer rules and regulations for the company to follow, which reduces the time and money spent with accountants and attorneys. 

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