Types of Business Ownership Structures
By Joseph Devine
A business ownership should be structured according to the needs of the owners and potentially liability that the business could incur. The different types of business ownership are:
- Sole proprietorship;
- Limited Liability Corporation;
- Corporation (for profit);
- Limited Partnerships; and
- Nonprofit corporation.
1 and 2) Sole Proprietorship and Partnership: A sole proprietorship or partnership, is the ideal ownership structure for an up and coming business or the average small business. They do not have to be registered with the state and go into effect as soon as one person goes into business with themselves or two or more people go into business together. Any business income is reported on the owner's personal income taxes. They are also personally liable for any business debts or court decisions against the business.
3) Limited Liability Corporations: Provide their owners just that, limited personal liability for business debts and claims. However, LLCs resemble partnerships when it comes to taxes. The owners of an LLC pay taxes on their shares of the business income on their personal tax returns. This type of organization is good for business owners who either:
- Could be sued by customers;
- Run the risk of piling up a lot of debt; or
- Have substantial personal assets they want to protect.
4) Corporations (for profit) The most significant benefit to forming a corporation is that it limits the owners' personal liability for business dents and any court judgments against the business. A corporation is an independent legal and tax entity. This sets it apart from other types of businesses. The owners do not use their personal tax returns to pay tax on corporate profits because the corporation itself pays these taxes. Any money drawn from the corporation in the form of salaries, bonuses, etc is paid by the owners in their personal income tax returns.
5) Limited Partnerships This type of business organization is costly and complicated to prepare. It is not recommended for the average small business owner. Limited partnerships are usually created by one person or company who solicits investments from others. The people who invest are considered the limited partners. The general partner is in charge of the business's everyday operations. They are personally liable for business dents. Limited partners have little control over daily business decisions or operations. Because of this they are not personally liable for business debts or claims.
For more information on business ownership structures, visit www.businessdirectoryforyou.com
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