Starting a business is like any life goal. It takes time, energy, diligence and patience, and it requires much decision making. The process can seem overwhelming, and it some cases, it can be a lengthy process. However, it is important to take it step by step.
When establishing a business, it is important to determine the type of business organization you’ll operate. In other words, what type of business structure will benefit you as the business owner and the business itself.
Choosing a business structure
While many factors come into play when determining the most suitable business structure, there are three reasons why a selection is made. This includes liability, income taxes and funding.
With regards to liability, this concerns the extent to which an owner or owners will be responsible for the debts and liabilities of the organization. Income taxes refers to the income tax the owner or partners will owe, if at all. Finally, funding pertains to the level of limitations or constraints on loans, investors and other means to obtain business funds.
Types of business structures
The four most common types of business structures include sole proprietorships, partnerships, corporations and limited liability companies.
A sole proprietorship is owned and operated by an individual. The individual will be liable for the debts and liabilities of the business and will pay taxes on any business profits as income on their personal taxes.
Partnerships are established when two or more individual run a business together. There are different types of partnerships, which include general partnerships, limited partnerships and limited liability partnerships. Each has different levels of liability, with the limited liability partnership enjoying protection from personal liabilities for business debts.
A corporation is a formal business structure, and it offers the greatest level of protection from personal liability for its owners. However, depending on the type of corporation established, there could be taxation implications to be aware of.
Creating a business is an exciting opportunity, but it also requires many decisions to be made. Thus, it is imperative that you are aware of the process, the decisions you need to make and the options you have.
