Types Of Businesses
One of the first decisions that a person(s) needs to make is how the company should be structured. The four basic legal forms of ownership for small businesses are a Sole Proprietorship, Partnership, Corporation, and Limited Liability Company. There are advantages and disadvantages as well as income tax ramifications associated with each type of organization. We aren't going to delve in to this area but; a brief description of the different types of organization and what they are is needed.
- Sole Proprietorship
- Most small business start out as sole proprietorships. These firms are owned by one person who is normally active in running and managing the business.
- Partnership
A partnership is two or more people who share the ownership of a single business. In order to avoid misunderstandings about how profits/losses are shared , who's responsible for what, and other management, ownership, and operating decisions the partners normally have a formal legal partnership agreement. - Corporation
A corporation is an organization that is made up of many owners who normally are not active in the decision making and operations of the business. These owners are called shareholders or stockholders. Their ownership interest is represented by certificates of ownership (stock) issued by the corporation.
Two types of corporations:
- Regular or "C" Corporation
Earnings are taxed to the corporation. Shareholders not personally liable for income taxes unless dividends are paid. - Subchapter-S
A special type of corporation allowed by the Internal Revenue Service (IRS) that passes or transfers its earnings to the individual shareholders who personally pay the income taxes.
- Limited Liability Company (LLC)
The LLC is a relatively new type of business structure that combines the benefits of a partnership and corporation.
Factors To Consider
Some Factors and a brief description of what to consider when choosing a type of organization:
Some Factors and a brief description of what to consider when choosing a type of organization:
- Tax Consequences - Federal and State
What taxes do you have to pay to the federal and state taxing authorities ?
Is the business organization a pass-through (income only taxed once) or is the income taxed twice ? - Ease and cost of formation and recurring registration fees
What documents do you need to file and what are the initial and recurring costs for the type of organization ? - Degree of control
Do you want to call all the "shots" ?
As a sole owner you get to. - Liability (personal)
Do your personal assets need protection from legal liability ?
Are you willing to be liable for others (partners) ? - Ability to get money (capital)
Do you need other investors to get your business "off the ground" ? - Type of Business
If your type of profession requires a special license, is it limited to what type of organization that can be selected ?All the different types of organizations listed above have some unique methods and rules for accounting for their transactions associated with their equity (ownership) accounts.
Types Of Business Activity
Our society is made up of all kinds of different types of businesses. Some sell products directly to the consumer and are known as retailers. Other businesses called wholesalers warehouse and sell large quantities of products to the retailers who in turn sell it to us (consumer). Businesses like myself provide and sell services to other businesses and individuals. Some businesses even tackle the task of actually producing (make) the products and are called manufacturers.
Our society is made up of all kinds of different types of businesses. Some sell products directly to the consumer and are known as retailers. Other businesses called wholesalers warehouse and sell large quantities of products to the retailers who in turn sell it to us (consumer). Businesses like myself provide and sell services to other businesses and individuals. Some businesses even tackle the task of actually producing (make) the products and are called manufacturers.
Many of these businesses are required to maintain and account for inventories of the products that they stock or have on hand.
Types Of Business Organization Videos