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Table of Contents

business formation

TYPES OF BUSINESS FORMATION

Choosing the best type of business formation that suits your business can be sometimes overwhelming, after an individual conduct research on what he/she wants to do yet one gets lost in defining the type of business formation (also known as business structure) they want. Truly, there are variety of choices like the LLC, S-Corporation, C-corporations. However, the decision may be clearer based on their differences. Here in this content, we will help you define each of the types of business formation, to know the one you belong.

SOLE PROPRIETORSHIP

A sole proprietorship is owned by one person usually without any type of protection in place to ensure his or her assets are safe from lawsuit. The company is built around this singular individual who builds a business that accrues revenue. However, most organizations are not completely protected from litigation even when insurance and certain contracts have been issued and drafted. Protecting the owner from costly suits in the court room is difficult to accomplish. It may be more complicated to transform a sole into a larger company such as a corporation if the need arises whereas an LLC (which is the next on list) has the capacity to do so with the right documentation and process. One of the advantages of a sole proprietorship it is less expensive and easy to form. Examples of this type of business are freelancers, creatives, growing start-ups, and storefronts.

PARTNERSHIP

 This is the simplest structure for two or more people to own a business together. There are no documents to sign for the state. But it is a good idea that all partners make a review of how the partnership will operates, and how all profits and losses will be shared. Partnership can be a good choice for business. If you are choosing this formation its important you type of partnerships. Types of partnership are.

General Partnership

A general partnership is a business that does not require forming a business entity with the state. This type of business is formed and signed by partners in agreement. Ownership and profits are usually shared among the partners.

In a general partnership, all partners have power to bind the business to contracts and loans. Here each partner is responsible for all the business’s debts and legal obligations.

Limited Partnership

Limited partnership is formally authorized by the site and are more structured than general partnership. To start up a limited partnership, you need at least one general partner who is in fully equipped for the business and one or more limited partners who provide money but does not have decision-making rights. The limited partner get ownership but don’t have as many risks and responsibilities as a general partner.

Limited Liability Partnership

A limited liability partnership, or LLP is a type of partnership where owners aren’t held personally responsible for the business’s debts and obligations of other partners. This means you can’t loss your personal assets if some else takes legal action against the company. LLP are not permitted in all states so it’s advisable you check if your state’s rules before forming an LLP.

LIMITED LIABILITY COMPANY

If your state statues authorized it, you can obtain a certificate of formation to establish a limited liability company. In an LLC, owners are also known as members. There is no maximum number of members. In some states, there are no restriction to ownership, so members may include individuals, corporations or other LLC entities. LLC protects you from personal liability such as your personal assets (your vehicles, house, and savings accounts won’t be risk in case your LLC faces lawsuits. Most states also permit “single member” LLC, that is those who are having only one owner. Another benefit of an LLC is that it is flexible, in terms of management and ownership.

CORPORATION

A Corporation is a legal entity that separates from its owners. Corporations strongly protects its owners from personal liability but forming one can be quite expensive than all other types of business formation. It also requires a broad record keeping, active operation process and reporting. In corporations profits and losses are retained by the business owners, and they pay double taxes. First, when the business makes profit and when dividends are paid to shareholder on their personal tax returns.

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