Are you planning to plunge all your efforts in the business world? Most of us want or rather aspire to own huge business enterprises that command good reputation. We all dream to make millions of dollars without having to go for a bank loan. One of the avenues that give each of us an opportunity to make generous profits is entrepreneurship which involves setting up a different legal entity structure depending on one's interests.
Although this could be true, it is not given! The type of business legal structure you choose can either make or break you. How? This is because different business structures have different ways of operation, different burdens when it comes to payment of taxes and different liabilities. Therefore, before going ahead and risking your hard earned money, you need to understand different business entities and their pros and cons in order to determine which one suits your interests.
According to experts, this is one of the simplest forms of business organizations one can ever have. It is a business formed, managed and controlled by one person who is the owner. The business and the owner are the same thing. When you form this type of business, you are your own consultant, you are the decision maker and all the losses and profits come to you. They include canteens, restaurants, simple shops and boutiques. For this meaning to stand, the business should not have branches in other areas.
Pros of Sole Proprietorship
The owner enjoys all the profits of the business: since it is owned by a single person, he enjoys all the profits that the business accrues.
Quick Decision Making: When it comes to making decisions about changing the type or quantity of commodities that the business deals in, you do not have to consult anyone.
A partnership is a type of business entity owned and operated by two or more individuals. The partners contribute money in order to raise the required capital so as to start the business. All of them are responsible for how the business operates and take part in decision-making. At times, the partners might decide to allocate each of them a different role so as to enhance the efficiency and performance of the entity. If you would like to start a general partnership, have a look at the pros and cons.
A limited type of partnership is whereby all the individuals have limited liability unlike in general partnerships where all partners have unlimited liability. A partnership operates as a limited type only after the partners file an application of registration with the secretary of state. These types of partnerships used to be limited to professional services such as lawyers, accountants or doctors.
However, nowadays even common businesses may apply for registration for as long as the partnership has partners that run and operate the business and partners who act as investors. Those running the business have unlimited liability while the investors have limited liability.
This is a business entity owned by a list of shareholders. The shareholders have the mandate to elect a board of directors whose work is to oversee the day to day running of the corporation. When it comes to decision making, it is the responsibility of the directors to make sure that any decision made benefits the corporation and is in support of the corporation's objectives. Also, the directors have the power to hire and fire employees. The employees of the corporation have the obligation to make sure that the targets of the business are met within a certain duration of time.
A corporation operates as a seperate legal entity from the owners. This means that the owners have limited liability. As a separate legal entity, it means it can buy real estate, sue and even get sued by creditors. An established corp can raise capital via sale of stock in the stock market. Its ownership can also be transferred from one party to another. It also has perpetual existence meaning that it can continue operating even if the ownership changes.
When you want to start a corportation, most probably you will be the major shareholder with authority to appoint directors. The directors will then go ahead to hire employees that will be responsible for the running of the company. A corporation operates under what is termed as corporation by-laws. This is a set of document that provides guidelines on how the corporation should operate. These by-laws can be modified as the company grows. Every year, the corporation should hold an annual meeting to discuss how the entity has performed.
The difference between an s corp and c corp is based on the taxation process. When it comes to an s corp, there is only one level or taxation. The income generated by the corporation is distributed among the shareholders for taxation purposes. However, with corps, there is double taxation. The corporate pays corporate tax on its own as a corporate while the dividends generated by the company and passed down to shareholders are also taxed in terms of personal income tax.
Before you take a step and register your business as an s corporation, you should beware of both the merits and demerits it comes with. The merits include:
This is a hybrid of both a corporation and a partnership. A limited liability company operates as a separate legal entity and hence has exclusive rights to buy and own assets, sue or be sued. It has a pass through taxation feature just like a corporation. This means that the members ( shareholders) only suffer from a single taxation just like in a partnership. Unlike a corporation, it has no stock and does involve fewer formalities during the formation process.
The owners of an LLC are called members and not shareholders like in a corporation. This has made many people refer to it as a corporation with fewer complications. This type of company operates under a set guideline of rules referred to as 'operating agreement'. These set of rules can be modified depending on how the business performs over a certain time duration. Operating a limited liability company is less complex since it only requires the members to meet once or twice a year to make or implement certain decisions.
Thus, establishing a business entity structure requires an entrepreneur to consider these things, the amount of capital, the type of liability and how easy it is for them to be formed. This is the guideline that one has to follow before deciding a business entity for themselves.