A major and most important decision which you will have to make before contemplating to start a business, is which legal structure you would be adopting. The structure of your choice would naturally depend on various factors like the size of your business, the type of business, besides other considerations such as your financial position and the scope of growth. The best guidance could, of course, be obtained from a legal advisor or a business consultant. To help you make the choice we enumerate the various established and most commonly used business structures.
A sole proprietorship is the simplest and the most uncomplicated common structure which can be used to start a business. Such a business does not need to be incorporated and can be owned and operated by a single person. The owner enjoys the right to take all the profits but he is also required to take responsibility for all business debts, losses, and liabilities. There are no formalities involved in the formation of a sole proprietorship. Like all businesses, the necessary licenses and permits have to be obtained, and registrations done. The business is not taxed separately and it has the lowest tax rates for businesses. The disadvantages however is that the personal liability is unlimited and it is often hard to raise money for this type of business.
A Partnership is a single business where the ownership is shared by two or more people. Every partner makes equal contribution towards funds, assets, work or skill so that each partner will equally share the profits and losses of the business. Since there is more than one person involved in the partnership where decision-making is concerned, a legal agreement should be drawn up about how the partners will divide profits, resolve disputes, change ownership and how to dissolve the partnership. There are three types of partnerships (i) General Partnerships, where it is assumed that profits, liabilities and management duties are divided equally among partners. (ii) Limited Partnerships which allows the partners to have limited liability as well as limited input with management decisions, depending on each partner’s investment percentage. This type of partnership is suitable for investors of short-term projects. (iii) Joint Ventures are like general partnerships but only for a limited period of time or for a single project. To form a partnership, your business must be registered with the state government.
A corporation is owned by shareholders and is an independent business structure. Here the corporation is legally liable for the actions and debts the business incurs and not the shareholders that own it. Corporations involve a much more complicated structure than other business structures because they have expensive set ups and overheads and complex tax and legal responsibilities. Hence, corporations are the advisable business structure for large companies with many employees. Corporations have the right and the ability to sell ownership shares in the business through stock offerings.
Limited Liability Company
A limited liability company is a mixed legal structure that blends the limited liability features of a corporation and tax benefits and operational flexibility of a partnership. The owners of a LLC are designated as members whose number may be one, two or more. This business which does not resemble the liability of shareholders in a corporation is not taxed separately. In the case of a LLC the entire profits and losses are passed through the business to each member of the LLC. The members show the profits and losses on their personal tax returns, in the same way as the owners of partnerships .
A cooperative differs in its formation from any other type of business. A group of members can come to an agreement on a common need and a strategy on how to meet that need. An organizing committee is formed and this committee conducts preliminary meetings, surveys and a cost feasibility analysis before every member agrees with the business plan. It is not mandatory that cooperatives should be incorporated, though many prefer to do so.
Even after one has opted to choose a particular business structure, one must keep in mind the legal implications and circumstances that make one type of business organization favourable. It is advisable to reassess your business structure from time to time to make sure you are implementing the form that provides the most benefits and gives you the best results.
The article discusses about the various types of business structures in detail and also gives comparative studies between them. Though the structure of your choice of business would depend on various factors like the size of thebusiness, the type of business, besides other considerations such as your financial position and the scope of growth. The best guidance could, of course, for starting your business could be obtained from a legal advisor or a business consultant who can help you start your business.