There are many reasons to start a business. They include personal independence and fulfilment, the ability to choose more flexible work hours and locations, and more options for engaging in what you love. Whatever your reasons and goals may be, understanding the different types of businesses is essential before starting one. This article will review some of the common forms of small business structure and the factors that go into choosing a form of business organization for your startup.
Sole Proprietorship
A sole proprietorship is the simplest form of doing business – any individual with a legal right to do so can assume this status without any formalities. The owner of the business is personally responsible for all debts incurred, whether they are related to the business or not.
Advantages: It offers unlimited liability to its owners. No formality is required to start a business in this category, which makes it easy and convenient for small businesses. Sole Proprietorships do not need to file annual reports or hold annual shareholder meetings since there is only one member. This also makes record-keeping simpler and reduces expenses.
Sole proprietorships are also easy to dissolve. If the business fails, the owners might be able to simply stop trading and close up shop; they do not need to formally liquidate their assets or wind down their operations.
Disadvantages: Owners of sole proprietorships are personally liable for any debts owed by their businesses. Also, profits pass through directly onto income tax returns, which means that sole proprietorships are not ideal for tax planning.
This form of business structure does not allow for expansion outside the owner’s personal capacities, and since there is no distinction between the individual’s property and that of their business, it can be very difficult to raise outside capital or sell off assets should an emergency arise.
Limited Liability Company (LLC)
A limited liability company, or LLC, is a good option for any small business owner who wants some level of financial protection without having to spend time learning about complicated legal procedures. The folks at Sleek Tech Pte Ltd recommend employing a company that specializes to help with incorporation. Most importantly LLCs shield their owners from personal liability for any debts incurred by the business but still allows for one or more of its members to serve as managers.
Advantages: LLCs offer limited liability protection that makes them an excellent choice for small businesses with little capital. This form of organization also has fewer formalities involved in its creation and ongoing operations. It is relatively simple to start an LLC.
Disadvantages: The biggest limitation of an LLC is that unless you elect otherwise, this type of business has no difference between the owner’s personal property and their business assets. This means it can be difficult to raise outside capital or sell off excess assets should a crisis arise.
Profit-Sharing Scheme/Partnership
This type of business structure offers many of the benefits of a corporation without the accompanying paperwork and accounting requirements. In this arrangement, both partners register but do not need to file any additional documents at a federal level. This type of business is also simple and inexpensive to start.
Advantages: This option gives small business owners complete control over their company’s assets and finances—and few tax-planning limitations since profits can be easily funneled into different businesses’ accounts for better management purposes.
Disadvantages: Profit-sharing schemes give no protection against personal liability or shield owners from legal actions taken against the company. This type of business also does not protect its owners from any debts incurred while their other businesses are still in operation.
Limited Liability Partnership (LLP)
This form of small business ownership offers all the benefits of a limited liability company while protecting its members from personal liability should anything go wrong. Like LLCs, it has no formalities required to register or operate, which makes this an attractive option for anyone who wants legal protection without too much hassle.
Advantages: An LLP is almost identical to an LLC in terms of structure and limitations, with one major exception: each partner enjoys some level of personal liability protection since they are able to claim the partnership’s liabilities on their taxes. Small business owners looking to sell off excess business assets will also find LLP’s slightly more advantageous since profits can be transferred freely between members—whereas, in LLCs, this might be subject to taxation.
Disadvantages: An LLP only offers liability protection to registered members and not the company itself —meaning that any debts incurred by the business could affect all partners personally. Each partner is required to pay taxes for their share of profits and losses—so selling off excess assets can become a confusing process.
From the limited time and resources of many small business owners, there’s not much room for error. The best way to ensure that your business is healthy in all areas is to choose a structure that offers both individual liability protection while making sure you’re not faced with any unexpected costs or hurdles when it comes time to sell off any excess assets should an emergency arise.
