Choosing a particular business type in the USA can be a bit tricky. Do you know how many different types of businesses are there? There is such a huge variety when it comes to the structure and forms, deciding the most appropriate business form is difficult. But before planning out any business idea, entrepreneurs need to evaluate every business structure and its pros and cons.
What are business types? It is the different options that are available to you while creating a business. We have created a detailed guide for you to assist you in the entire process of learning about different business types of ownership in the USA:
What are the 4 types of business?
1. Sole proprietorship
It is the most basic unincorporated business structure with just a single individual owner. It means this type of business is not viewed as a separate legal entity. It is probably one of the best forms among all business management types for people who want complete ownership and control over every aspect of their business.
The best part is that you can set this business up at a lesser cost. You will enjoy plenty of tax benefits in this form of business. Your income is considered to be the company’s income, so you have to pay the tax only once. There are also relatively fewer business rules and regulations.
However, as the owner of a sole proprietorship, you will be personally liable for all the company’s liabilities. You will enjoy the least legal or financial protection in this business form among other business different types.
Business types sole proprietorship:
- Self-employed business owner: Here, the business owner does not have any contractual relationship with the client. The main aim is profit-making.
- Independent contractor: An independent contractor has complete control over a particular task and is fully liable for its completion.
- Franchise: A franchisor always operates on a set business model with different pre-decided aspects such as pricing, operations, marketing expansions.
Advantages and Disadvantages
Advantages:
- Easy dissolution process
- No tax aspects
- No formalities other than official book-keeping
Disadvantages:
- Business comes to an end with the death or bankruptcy of the partner
- The owner has massive financial obligations.
2. Partnership
Suppose, you and your friend together want to form a business. This is known as the partnership structure. In this business form, two or more people come together to create and own a business.
A partnership firm enjoys similar tax benefits as a sole proprietorship. The disadvantage here is that the partners will be personally liable for all the liabilities of the firm.
However, the three business types of ownership are:
- General Partnerships: Here, every single partner has unlimited liability. Every partner can use his/her assets to repay off the debt of the firm. Each partner also has to undertake the responsibility for the other person’s actions.
- Limited partnerships: These partnership firms need to have at least one partner who has unlimited liability towards the firm. Other partners of the firm will be limited partners who will be only liable up to their financial contribution towards their business. But they cannot enjoy any direct control over the management of the business.
- Limited liability partnerships: The only difference between this form with a general partnership is that the partners here are liable only for their actions. However, it is only applicable to fewer business fields, like a CA or CS or a legal advisor.
Advantages and Disadvantages
Advantages:
- Taxed only once.
- A partnership agreement outlines all the crucial aspects.
- Inexpensive formation process.
Disadvantages:
- One single partner might need to pay off the entire business debt.
- There is no difference between a partner’s finance and business finance.
3. Limited liability company
Most businesses prefer this structure since it has the best features of both a company and a partnership. As an owner of this business form, you can enjoy the tax advantages of a sole proprietorship and the limited liability feature of corporations. Limited liability also gives protection from the liabilities of the other business partners.
Business types LLC:
- C Corporation: In this common business form, the owners and the business is taxed on their respective profits separately.
- S Corporation: The structure is similar to that of a C corporation, but only a maximum of 100 shareholders is allowed. Also, here taxes are levied on the profit only once.
- Non-profit corporation: This business structure is exempted from any tax deduction. It is because they are formed with a non-profit motive for some charity purpose. The owners of this business cannot share any profit that the business earns. It has to be utilized to fund the aims and plans of the company.
Advantages and Disadvantages
Advantages:
- Extreme flexibility
- Tax benefits
- Members are not personally liable.
Disadvantages:
- Some states require the LLC to have a pre-determined dissolution date.
- If one of the owners cannot be part of the business for some reason, other owners need a majority vote to continue.
4. Corporation
It is the most complex business structure among all business major types. The process of incorporating such a business is quite elaborate and complicated. The owners need to submit articles of incorporation which contain several crucial details of the business, like name and location of the business, number of shares that the company will issue, the reason behind forming the business.
However, none of the owners are personally liable for the company’s legal disputes or debts. Even if one of the owners dies or is bankrupt or cannot be part of the business for any other reason the business continues.
Advantages and Disadvantages
Advantages:
- Can sue in its own name
- Can enter into contracts
- Can pay its own taxes
Disadvantages:
- Owners have to follow several expensive legal formalities
- The taxation structure is complex.
Choosing a particular business type from so many options can be overwhelming. Having a complete overview of all the business types can make the process simpler. You can now easily compare and find out what best suits your business.
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