What forms can a business take?

by | May 5, 2021 | Firm News |

When forming a business, one of the important decisions that entrepreneurs must make is the type of business they will form. What are the advantages and disadvantages of four common types of businesses?

1. A sole proprietorship

In a sole proprietorship, a business owner is forms the core of their business. Because these businesses involve fewer startup costs and paperwork, sole proprietorships offer entrepreneurs a great deal of flexibility in running their business.

However, a sole proprietorship has distinct disadvantages, too. Because these businesses do not draw a distinct line between the business and its founder, there is also no distinct division between the income of the business and the founder’s assets. This leaves them liable for the business’s debts and taxes.

2. A partnership

For many entrepreneurs, a partnership allows them to build on their own strengths with the help of one or more partners to create a stronger business. Partnerships allow a business to benefit from the unique skills of multiple people.

It is important for business owners to consider the disadvantages of a partnership, however. Involving additional people means sharing control of the company, dividing profits and addressing potential conflicts about the direction of the business.

3. A limited liability company (LLC)

A primary advantage of forming an LLC is that it shields business owners from liability for their business’s debts. By creating a clear delineation between the business and its leadership, an LLC protects the owners from business losses. As a result, LLCs are one of the most popular options for business organization.

However, an LLC often involves higher startup costs and involves greater legal complexity. LLCs must follow a variety of legal regulations, and business owners often need additional legal guidance as a result.

4. A corporation

Corporations are legally separate from their owners. This protects those owners from liability for company debts or losses. Because they are legally distinct from their owners, they can also be transferred easily to new owners.

Corporations are often the most complex type of business to form, however. They are governed by a greater number of procedures under state law and often cost more to establish. They also may involve more complexity when paying taxes.

Entrepreneurs uncertain about the business type that is best for them may want to consult an attorney. Experienced legal guidance can help business owners determine which type of organization is the best fit for their business and help them establish the foundation for future success.