When you start a company, one of the major dilemmas would be about the type of company to establish. There are sole proprietorship, partnership, and corporate options to choose from. Sole proprietorship has one owner who takes care of the entire business while a partnership has a minimum of 2 owners who are responsible and a corporation is completely different. A corporation is a well-fashioned business structure that holds an independent identity from the owners. The owners may have stakes in the company, though.
Understanding how each type of company works will help you choose the best because the right one for you depends on the type of business you want to start and how you want to proceed. There is no universality here about one type of company being the best.
If you are the only person starting a company, you can go with sole proprietorship. It is extremely easy to form and doesn’t come with too much hassle. Also, it won’t take you long to go through all the legal procedures and establish your company. One disadvantage of this type of business is that it you will have to face unlimited liability. This means that your personal assets are not protected in case the company faces debts. However, you will appreciate the fact that your internal revenue system will be free of taxation. This is one of the biggest advantages of sole proprietorship along with it being extremely easy to form.
In order to build a partnership company (private limited), you need at least 2 owners. It is fairly easy to start a partnership as well but the paperwork and the time required will be more when compared to sole proprietorship. The biggest advantage here is that your business will not be a separate entity when it comes to taxation. Each partner will have to file taxes for his/her share in the company. However, just like in the case of sole proprietorship, you will face unlimited liability in times of debts. Also, people don’t usually prefer going with this structure because you cannot make any decision without the consent of all the partners. There have been many cases of partners falling apart and the company seeing a dead end due to disagreement. That is the reason why it is advised that you choose partners very carefully.
Corporations are highly structured and require officers, directors, employees, and shareholders. Sole proprietorships and partnerships do not require such a complicated structure. There are quite a few corporate benefits but the biggest one is limited liability. This means that your business will be treated as a separate entity and your personal assets will remain untouched. However, forming a corporation is very taxing and requires a lot of paperwork.
We advise you to talk to your business lawyer and understand further. Expert advice will help you understand which way to tread. Remember that laws vary from country to country and from state to state. Check the laws in your state about each type of business so that you make the best decision.
You have 3 main types of business structures: sole proprietorship, partnership, and corporation. Each comes with benefits and lapses, which is why you are advised to understand each type before making a choice.