Undertanding the Different Types of Businesses

There are many different types of businesses, each have different legal obligations and requirements. When you first decide to start a business you will need to decide what type of business you want to have.

The type of business you start will also affect many of the aspects of your operations, including accounting and legal liability. It is important to choose your business type carefully before you ever make your first sale.

There are four main types of businesses:

1. Sole Proprietorship
2. Partnership
3. Limited Liability Company (LLC)
4. Corporation

The simplest type of business to start is a sole proprietorship. With this type of business, you will be operating as yourself under an assumed business name. For example, you may want to conduct business under the name “Apex Merchandise”, but the actual legal name of the business will be “(Your Name) DBA Apex Merchandise. This simply means that you are the owner and sole proprietor of your business, but you are “doing business as” Apex Merchandise.

Simplicity is the sole proprietorship's main advantage. In many states, you do not even have to register your sole proprietorship - you can simply hang out your sign and start making sales. One of the primary disadvantages, though, is that you will retain personal liability for the finances and legal operations of your business. If your business becomes insolvent, your creditors can go after your personal assets, including savings, your home, and your personal property, to recover payment.

A partnership works in much the same way as a sole proprietorship, except that there are two owners, instead of one. Most often, a husband and wife are the business owners, although this does not have to be the case. Each partner can be fully liable for the debts of another, so it is very important to keep accurate accounting records.

With a limited liability company, or LLC, the owners are somewhat protected from liability of the company's actions. It is essentially a hybrid between a partnership and a corporation. The main advantage of a limited liability company, aside from its ability to protect its owners, is that it is much easier to form than a corporation. Also, it is not taxed as a separate entity - the owners are taxed in much the same way as a sole proprietorship.

If you plan on having a large company with several owners, a corporation may be the best solution. It offers its owners maximum protection against legal liability, and makes business operations entirely separate from personal finances. However, the process of forming a corporation is quite formal, and requires substantial paperwork. A corporation is taxed separately to the owners and the accounting fees can be much more expensive.

Choosing a company type depends largely on how you will operate your business. If you want to start a very small business, and plan to handle many of the day to day tasks yourself, a sole proprietorship or partnership is a good way to get your business up and running quickly. However, if you will be partnering with several other owners, and you want to form a complex business that derives income both from operations and investments, forming a corporation is the logical choice.

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