The most common types of business structures in the United States are sole proprietorships, partnerships, and corporations. The best type of business structure depends upon individual circumstances and preferences. Some factors to consider are ease of formation, liability, and how each type of business is managed.
Sole Proprietorship
In a sole proprietorship there is one owner, who is the sole decision maker and owns all business assets. A sole proprietorship is the easiest business structure to form. The owner reaps all profits from a sole proprietorship. However, the owner also has unlimited personal liability, which means that all debts incurred by the business extends beyond the business assets to the owner’s personal assets, such as automobiles, savings accounts, and real estate holdings, according to Business Organizations for Paralegals by Deborah E. Bouchoux published in 2006.
Partnerships
There are various types of partnerships: general partnership, limited partnership, and limited liability partnership. Each type has various benefits and liability. Also, the various types differ in how much control each partner has over business operations.
A general partnership consists of two or more persons who co-own all of the business assets and share decision-making, profits, and losses. All the general partners have unlimited personal liability for the business obligations.
A limited partnership is also managed by one or more general partners, who all have unlimited personal liability for business obligations. But, unlike general partnerships, in this type of partnership there are limited partners, who do not manage the business and have no liability except the amount contributed to the business. However, the limited partners, despite having no managerial responsibility, can be held responsible for the torts or wrongful acts of the managing partners.
This is unlike a limited liability partnerships are a newer form of partnership. These partnerships are similar to limited partnerships, except limited partners are not liable for the torts or wrongful acts of their co-partners.
Corporations
Like partnerships, there are several types of corporations, each with their own advantages and disadvantages. A corporation is an entity created by the person or persons who organize it. The corporation is a separate entity from its members, which are called stockholders.
The corporation, due to being a separate entity, is subject to taxation. This is called “double taxation,” which means the shareholders also pay tax on distributions made to them. The liabilities of the shareholders and board members and how the corporation is managed vary with each type of corporation. The different types of corporations are: limited liability corporation, professional corporation, S corporation, nonprofit corporation, and close corporation.
In a limited liability corporation members are provided limited liability from obligations of tort or contract. Either the members or designated managers operate business activities.
Corporations formed by professionals are called professional corporations. Professionals, such as doctors, lawyers, and accountants, may decide to incorporate to gain certain tax and other benefits. However, these professionals remain liable for personal negligence and negligence of employees.
An S corporation does not pay taxes as a separate entity, and all income earned is passed through to the shareholders. All shareholders must agree to apply for S status, which is only available to certain corporations.
A close corporation is owned family members and friends. The shareholders in a close corporation are allowed more flexibility in management. Also, close corporations do not need to adhere to all of the formalities required of other business corporations.
Which Type of Business Structure is Best?
The procedures and fees associated with forming each type of business structure vary. Each type of business structure requires different local and state legal paperwork. Some types of business structures are expensive to form, while others are more affordable. Corporations are more complicated and expensive to form than sole proprietorships and partnerships. With all of the different options for starting a business, it is advisable to obtain the advice of a business attorney.
Le Bach Pham - After graduating from UCSD with a bachelor of art in English Literature, I am now a web writer for Demand Studios where I write web ...
