Knowledge on the types of companies can be useful for an entrepreneur as he can compare and understand the advantages and disadvantages of all options available around him. Choosing a type of company which suits the financial condition and expansion vision of the initiator becomes very crucial before starting a company.
1. Sole Proprietorship
A sole proprietorship is one of the most simplest and uncomplicated of all companies. This kind of business organization has a single person who owns and controls it. He is the one who makes sure the entire business functions smoothly and is also accountable for any profit or loss the business makes.
Certain other features of the sole proprietorship business organization are:
- Does not require a lot of money to form.
- The dissolution procedure is very easy, and quick.
- There are very few tax related facets attached with this type of business organization
- Any liabilities in business are the proprietor’s personal liabilities
- Whenever the owner dies, the business organization also automatically stops existing.
- The owner has unlimited liability in the organization.
This form of business structure is useful for people who have an expertise in a certain field and want to make money by applying that knowledge. There is no need to consult other people in the organization before taking any decision and also employees have no stock options. However, when it comes to taxation and other financial aspects, there is no difference between the proprietor’s personal life and business, as it is regarded one and the same by the government.
It is therefore important to have a good knowledge about these obligations, before deciding to start a sole proprietorship.
Partnership firms involve a business organization formed between two or more people. All these members are known as partners and are joint owners of the entire business organization. The partners are accountable for any profit, loss, or liability of the business organization.
An important feature of this company is that all partners enter into a pre-defined agreement regarding profit sharing and loss bearing, before starting their venture.Irrespective of the capital brought in or the profit-loss sharing percentage of a partner, he can be asked to pay off total debts of the company, as the partners have a joint as well as several liability in the organization. Certain other features include:
- Similar to a sole proprietorship, partnership ventures are simple, and quick to form
- The whole taxation policy and obligations are a little complex, but there is no specific tax for the partnership firm.
- Every partner is jointly and individually liable to the entire firm.
It depends upon the agreement between partners, as to how they would like to run the firm. Dissolution of the firm takes place when a partner turns bankrupt, dies, or through a mutual decision between the partners. Before getting into a partnership firm, it is important to understand that the financial obligations and agreement between partners.
Partnership firms are broadly divided into three types:
- General Partnership: Every partner enjoys equal ownership rights along with profit sharing and loss bearing, unless specifically mentioned in the agreement.
- Limited Partnership: In this type, not all partners participate in the running of business. One of them is responsible for this, while others bring in the capital.
- Joint Venture: This particular partnership is formed by two people only for a particular project and is dissolved on its completion.
3. Limited Liability Company (LLC)
This is one of the more recent types of companies which has come into being. A limited liability company is a mix of business corporation and partnership and provides greater flexibility by blending the benefits of both. Similar to partnership firms, an LLC can be as simple or complicated as the partner wants it to be.
According to rules of the state, partners in an LLC get limited liability or unlimited liability.A few state laws also call for a pre-fixed date to be decided by members at the time of formation, when the firm will dissolve. Tax obligations of an LLC are similar to ones applicable to a partnership firm.
However, during formation, members should be careful in not including more than two features of a business corporation in the agreement, or else the LLC will be treated like a business corporation for taxing purposes.The best part about LLCs is that they are very flexible and therefore can be formed to run a variety of business ventures.The most important part in the formation procedure is the agreement between members, and hence it needs to be carefully created.
4. Business Corporation
Of all the types, the business corporation is the most complex. Whenever a business corporation is incorporated or registered with the government, a new separate entity is created. This is distinct from the owners and therefore irrespective of the personal financial condition of all shareholders, the organization continues to function until dissolved.
The shareholders, or owners, decide and elect directors who form necessary policies and rules for the proper functioning of the organization. Various mangers and officers are appointed by these directors who actually control the daily on goings of the organization. There are numerous legal formalities like approvals and meetings which need to be adhered to by corporations.
There are basically 4 types of business corporations – General Corporation, Close Corporation, S Corporation, and Non-profit corporation. With basics remaining same, there are a few differences in terms of number of share holders and profit sharing polices, which separate them from each other.There are a few advantages of a business corporation.
The most crucial one being the fact that a business corporation is treated as different from the owner and his personal liabilities. However, it takes a lot of time, money, and legal formalities to set up a business corporation.Choosing a particular company for starting a business from the various types of companies discussed above, is perhaps now a little easier.
Understand that this is more like an overview and get proper detailed information on each type before venturing into one.