When you choose to start a business, you’ll need to select a business type, and this will have a huge say in how you run your business. One of the first challenges you’re likely to encounter as a new entrepreneur, is which business type you should go for. This is as the business type you choose will have a role to play in how much you have to pay in taxes, as well as your personal liability.
If you choose to run a business as a soke proprietor, for example, then you and your business will be considered the same business entity. If you choose to operate a non-profit business on the other hand, then you can apply to be tax exempt. Choosing the right business structure for your small business doesn’t need to be difficult. As long as you know what each type means, and what you can get from running a business of each type. You can then make an informed choice about your business structure.
Choosing The Right Business Type
The business structure you choose can have long-term effects on how you run your business. It can effect how you file your taxes, your personal liability, and even how you hire employees. Running as business as a sole proprietor is a popular choice for many business owners. They find that the personal liability they have to deal with, is a minor risk they can contend with.
But if your business is in a high risk industry, such as selling firearms online, then you should consider a more formal business structure. Some business owners may also want to keep their business and private matters separate. You will however, have to do more paperwork to register as a different business type, and the cost of registration may be higher as well.
When it comes to taxes, you can either file taxes for your yourself and your business, as the same entity. Or you and your business can file taxes as separate entities. If you have a partner or an investor, then you won’t be able to register your business as a sole proprietorship. You can instead choose to form a partnership, a limited partnership, or an LLC.
Once you’ve considered all the factors you need, to choose your business type, it’s time to choose from the seven different business types.
Popular Business Types You Should Know About
There are seven types of businesses that you can choose between. They include:
- Sole Proprietorship
This is the most popular type of business, especially among online business owners. A sole proprietorship is a business type that is owned and managed by one person. You also don’t need to register this type of a business. When you operate a business by yourself, you’re automatically considered a sole proprietor. Depending on what you sell however, such as liquor and alcohol, you may need to apply for permits and licenses, in order to sell them.
You should note however, that if you choose to work as a sole proprietor, then there won’t be any legal distinction between you and your business. This means that as the owner of your business, you’ll be responsible and accountable for profits, liabilities, as well as legal issues of your business.
Forming a partnership with another person can be a great idea. You can use your combined knowledge, pool your resources, get private funding, and more. It is important to keep in mind however, that all responsibilities as well as liabilities, are split equally. There are several types of partnerships as well, such as limited partnerships. These allow you to better define the roles and responsibilities, as well the liabilities, of each partner.
To operate a partnership, you’ll need to register your business with the state. You’ll also need to get a business license, as well as other necessary permits and licenses.
- Limited Partnership
If you own a business and need to raise capital from lenders and investors, then you can consider this business type. Complete a course at Entre Institute if you want to grow this business. But first, you should check Entre Institute reviews. Should you need to raise capital, but don’t want the investor to play a role in your daily operations and management, then choose this business type. In a limited partnership, one partner is a general partner, while the other partner is a limited partner.
The general partner has managed daily operations, and holds personal liability. The limited partner on the other hand doesn’t manage daily operations, and isn’t liable for business debts. A limited partnership business needs to be registered with the state, and you’ll also need to inform the IRS about your business, as well.
A corporation is a type of business, that is considered its own legal entity. Shareholders make up the business, and each shareholder typically holds one or more stocks in the business. This kind of a business is often know as a ‘C Corporation’.
If you are an established business owner, and have several employees, then you can consider this business type. Note that you’ll be taxed twice, your business and you will be taxed separately. However, this is a popular business type for large businesses.
- Limited Liability Company
Also known as an LLC, this business type is like a combination of a partnership, as well as a corporation. In an LLC, the shareholders are called members. Of them, the managing member is responsible for taking care of daily operations. LLCs, however, aren’t taxed as an entity that is separate from the members. Business profits and losses are moved to the members, who then report it on their federal tax return.
The great thing about an LLC is that members aren’t considered personally liable, when it comes to taking business decisions. There is also less paperwork involved, when compared to setting up a corporation.
- Nonprofit Organization
Nonprofit organization are those that promote either an educational, or a charitable cause. It’s called a ‘nonprofit’, as the money earned by the organization, goes into its expenses, programs, and more. There are several types of nonprofits available, and many of these can receive the ‘tax exempt’ status as well.
You’ll need to file the proper paperwork, before a government can recognize you as a nonprofit. They can also inform you as to the kind of nonprofit your organization falls under.
A cooperative is a business type that is completely owned by the members, and is operated for their benefit as well. Whatever the cooperative members earn, is then shared between the members. This amount doesn’t need to paid out to a stakeholder or investor. Shares from the cooperative are sold to the members, who can then have a say in how the cooperative manages itself.
To be considered a cooperative, the organization needs to create bylaws, have an application for members, as well as board of directors. The board should also participate in charter member meetings.
These are the most important types of businesses you can consider. As a business owner, you should also consider business insurance Australia. Business insurance can help you protect your business against common risk factors, such as getting sued and business disruptions. Learn more about small business insurance.