So, you’ve finally decided to take the plunge and become an entrepreneur, starting your own business. Congratulations! Have you decided what form your business will take? This is an important decision when starting any business, large or small. There are four main types of business entities from which you can choose: sole proprietorship, corporation, partnership or limited liability company (otherwise known as LLC).
A sole proprietorship is a business which is owned directly by a single individual. That individual is solely responsible for all aspects of the business and is personally liable for all debts, even those in excess of the amount invested in the business. Advantages to having a sole proprietorship include low organization costs, the greatest freedom from regulation, possible tax advantage, and minimal working capital. Disadvantages to this form of business include unlimited liability, difficulty in raising capital and lack of continuity.
A corporation is a separate legal entity which acts as a single person and is created under statutory law. The corporation owns the business and, in turn, the corporation issues shares of stock to individuals investing in the corporation. Advantages to having a corporation are limited liability (as investors may be liable only for the amount invested), ease of transferring ownership through selling shares, ease of raising capital (also through selling shares), possible tax advantages such as a corporate tax rate, specialized management and continuous existence. Some disadvantages to corporations are the close regulations by the state that they undergo, the greater organizational and record keeping costs, the expense of this form of business (it is the most expensive form to organize), and the possibility of double taxation.
A partnership is a business jointly owned by two or more individuals and/or entities. Each of the individuals/entities is personally liable for the debts of the partnership. In some respects, the law treats a partnership as a legal entity, but in others, it does not. The rights and privileges of the partners and the partnership are defined by law and the partnership agreement. Advantages to forming a partnership include low organization costs, additional capital and management resources from more than one person contributing, possible tax advantages, and limited outside regulation. Disadvantages include unlimited liability, difficulty in raising capital, divided authority, and the possible difficulty in finding suitable partners for your partnership to be efficient.
A limited liability company, or LLC, is a form of business that is taxed as a partnership, instead of a corporation, for federal tax purposes. However, in contrast to a partnership, a LLC may allow its owners to be involved in the management of the business without exposure to personal liability. Advantages of an LLC include, of course, limited liability, reduced organizational costs, relaxed regulation, and flexible allocation of income/expenses. There are no real disadvantages to having this type of business entity.