Choosing the form of small business you operate under requires some planning and foresight. Variables such as administrative costs, tax planning and control need to be considered.
There are several options available and none are “the best”. It all depends on your needs. Here’s an overview of the various types of business structure.
1) Sole Proprietorship
• By far the simplest method, sole proprietorship is most common for small business ownership. A sole proprietorship operates either under your own name, or under any name you choose (DBA – Doing Business As), provided you do not add any of the legal designations of other forms of business such as Ltd. or Inc.
• As a Sole Proprietor, it is not really necessary for your business to be registered (although sometimes this is a good idea, especially if your product or service is popular – by registering your business name, you will have a modicum of copyright protection).
• A sole proprietorship is basically an extension of your personal identity and as such, you can include business transactions as part of your personal income. This eliminates the obligation to file taxes separately.
• The advantages of setting your business up as a sole proprietorship are ease of setup and administration. You alone control both sales and costs, allowing more comprehensive operational leverage.
• Although sole proprietorship has many cost-cutting and control advantages, there are some drawbacks to this type of ownership. With this type of designation, your business is legally linked to your personal worth – therefore you must assume all responsibility, legal or otherwise, for your business.
• In a nutshell, this means that as sole owner you are personally responsible for all debts and liabilities relative to your business. So, if your business goes bankrupt, all your personal assets (such as your house) can be seized to cover your liabilities. In addition, sole proprietorship limits your tax flexibility.
2) Partnership
• A partnership is a legally binding relationship between persons operating a for-profit business. Legally, partnerships are not restricted to two people – there may be many co-owners. Unlike sole proprietorship, a registered partnership is a separate legal entity.
• Basically, partnerships can be set up in one of two ways – as a general partnership, where each partner is jointly responsible for liabilities, wrongful acts or omissions relative to the business, or as a limited partnership, where one can invest in a business without being involved in day-to-day operations.
• As a limited partner, your liability to the business and its creditors is limited to the amount of money you have invested. However, you have do not have the right to participate in the Company’s management, nor can you act on behalf of the Company. Only certain businesses are legally allowed to operate as limited partnerships.
• Before you consent to operating your business with someone else, you should be quite confident that your working relationship with that person is above reproach. Successful partnering relies on taking advantage of complementary talents, combined with a certain level of trust and respect for one another; therefore you must choose your business partner carefully.
3) Limited Liability/Corporation
• A limited liability corporation (sometimes called an LLC in the US, and “Ltd” or “Inc” in Canada) is a method of operation which legally isolates owners and shareholders from any personal responsibility for debts, obligations or acts by the Company, making this form of ownership a distinct and separate legal entity.
• As a shareholder in a corporation, you assume responsibility only for the unpaid portion of the shares you own. As a corporation, no one member of the firm can be held personally responsible.
• While LLC’s and Corporations offer many advantages, the cost and operational depth are often beyond the means of most start-up businesses. Additionally, laws vary from country to country and state to state, so this type of business set-up should never be attempted without secure and knowledgeable legal representation.
4) Co-operatives
• Owned and controlled by its members, a Cooperative can conduct business under the corporate umbrella – that is, individual liability is limited to the value of held shares. Only certain businesses qualify as co-operatives, so obtaining legal advice for this method of operation is essential.
Remember, you should never jump into business head first. Always test the waters and make sure you are operating in a legal and self-protective manner. Knowledge is power, so make sure you are aware of and adhere to the legal ramifications of owning your own business.
This article is intended for information purposes only and should not be construed as legal or financial advice.
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It was my understanding that LLC is an abbreviation for Limited Liability Company and that an LLC is different than a Coproration in its structure and tax liability. Please clarify. Thank you.
The are other disadvantages also for LLC such as
1) The life of the Limited Liability Company is not unlimited like a corporation. Different events could occur to dissolve the company.
2) strict record keeping requirements and some states require notices to be published upon formation and on a continuing basis for a period of time
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