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Types Of Businesses

 

Sole Proprietorship

This is the simplest and the most widely used structure for business. It is the least regulated type of the various business structures. For tax and legal purposes the business is the owner. The unlimited liability factor is probably the greatest disadvantage. The liabilities of the business are personal to the owner and the business ceases to exist when the owner dies.

Disadvantages

  • all of the personal and business assets of the sole owner are at risk in the sole proprietorship
  • a judgment against the sole proprietorship could reach into the personal assets of the sole owner
  • liability insurance premiums are very high. Perhaps too costly for the resources of the sole owner
  • due to the structure it may be difficult to obtain a loan.  If there is insufficient collateral a sole proprietor may have to mortgage a loan or place another piece of personal property as collateral
  • when the sole owner dies often the business ceases to exist due to the lack of structure in this business form

Advantages

  • sole owner has total control over the operations of this business
  • least regulated form of business
  • other than records for tax purposes there are no legal requirements as to how the business must be operated
  • usually one only needs to obtain a license or pay a fee to a local registry authority.

The Limited Partnership

The limited partnership is a hybrid type of business structure. It contains elements of both a traditional partnership and a corporation. The limited partnership form of business structure may be used when some interested parties want to invest in a partnership but want only limited liability and do not wish to exercise any control over the business activities of the partnership.

The Limited partnership is subject to much more regulation on the state level than either the sole proprietorship or regular partnership. Each state in the Union has adopted strict regulations according to the Uniform Limited Partnership Act governing the formation and operation of the Limited Partnership.

A limited partnership consists of two types of partners; the general partner; one or more people who actively manage the partnership; and the limited partner; one or more people who invest in the partnership but take no active role in the management of the partnership. The general partners are at personal risk for their conduct of the partnership whereas the limited partner risks only that which he has invested in the partnership.

Disadvantages

  • There is always a chance for a lack of continuity and clear cut guidelines amongst the partners concerning who does what and how to conduct business.
  • Due to the state regulations, limited partnerships are subject to more paperwork than the general partnership.
  • General partners maintain full personal risk. The limited partner risks losing the benefits of the limited partner status if they take any active role in the conduct of the activities of the partnership.

Advantages

  • The limited partner, as long as he remains passive, has no personal liability and risks only that which he invests.
  • This low risk for the limited partner and the fact that the limited partner shares in the profits and tax deductions with no duties regarding the active conduct of business may make it easier for the partnership to find investors.

The Corporation

A corporation is an artificial entity created by filing Articles of Incorporation with the Secretary of State. This gives the corporation existence and a legal right to conduct business in the state of incorporation. Corporations are more complex than either a partnership or sole proprietorship and are subject to more regulation by the state.

The internal rules of the corporation which outline the mechanics of the operation and management are called the by-laws.

Corporate Structure: A Concise Explanation

Shareholders: They own share in the business but do not engage in the direct management of the operation except by electing the directors of the corporation and by voting on major corporate issues.

Directors: They may be shareholders, but as Directors they do not own any of the business. As group known as the Board of Directors, they are jointly responsible for making the major business decision for the corporation as well as appointing the officers of the corporation.

Officers: they may be shareholders and/or directors, but, as officers, they do not own any of the business. They are responsible for the day-to-day operations of the corporate business. Usual titles for the different corporate officers are: President, vice-president, Secretary and treasurer.

Disadvantages of Incorporation

  • due to the organizational structure in a corporation, a certain degree of individual control is necessarily lost by incorporation
  • the technical formalities of corporation formation and operation must be strictly observed in order for a business to reap the benefits of corporate existence.
  • the initial state fees that must be paid for registration of a corporation can be very high
  • corporations are also subject to a greater level of governmental regulation than any other type of business entity.
  • profits are subject to double taxation when distributed to shareholders in the form of dividends.

Advantages of Incorporation

  • potential for limited liability is one of the most important advantages of the corporate form of business structure. The liability of corporate debt is generally limited to the amount of money each investor has invested.
  • a corporation can theoretically have perpetual existence.
  • a shareholder may freely sell, trade or give away his stock unless this right is formally restricted by corporate decision
  • taxation can be both an advantage and a disadvantage.

The Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a hybrid business entity, designed to combine the advantages of a corporation with the tax advantages of a partnership. Like a corporation, the owners of an LLC are not personally liable for the LLC's debts and obligations. Like a partnership, an LLC can be treated as a pass-through entity for tax purposes. Beginning in 1997 the IRS no longer taxes these entities as corporations. They permit the LLC to elect whether taxation as a partnership, sole-proprietorship or corporation best fits the needs of its business and its Members. This may be advantageous for those who cannot meet the IRS requirements for an "S" corporation and desire the tax pass-through treatment.


 

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