Starting up your own small business comes with a lot of decision-making, and one of those necessary decisions is choosing the right structure for your business. In the world of small businesses, there are three available structures that each come with their own advantages and disadvantages. Consider your circumstances, business risk, and business goals before deciding which of the three small business structures is right for you.
A sole proprietorship is a small business owned by a single individual. This type of business is easy to form, especially since you are automatically considered a sole proprietorship if you perform business activities without registering as any other type of business. Even if you do it this way, you can still obtain a trade name.
Something important to keep in mind is that sole proprietorship does not operate as a separate entity—if the business accrues debt, the owner is liable to clear it, even if it has to be done with personal finances and assets. This is known as unlimited liability. Due to this, a sole proprietorship is best suited for low-risk businesses.
There are two types of partnership business—a limited partnership (LP) and a limited liability partnership (LLP). The partnership business structure is for companies being run by two or more individuals.
A limited partnership has one partner with unlimited liability, while all others have limited liability. The risk is higher for the partner with unlimited liability, but they maintain the most control over the company.
A limited liability partnership operates with all partners having limited liability, meaning each owner is protected from having to use personal funds and assets to pay off any debts accrued by the company. This can be beneficial because one person doesn’t have more control than the others, and each partner won’t be held responsible for the actions of the others.
Limited Liability Company
A limited liability company (LLC) is a cross between a partnership and a corporation. The benefits of an LLC are limited liability and lower tax rates. Something to note, however, is that every partner of an LLC is considered self-employed and must pay self-employment taxes.
Another interesting consideration of the LLC business structure is that they can be subject to limited lifespans and may be disbanded after a transfer of ownership unless they have a legal agreement that prevents this from occurring.
An LLC is the best option for a medium or high-risk business that is still small enough to avoid going corporate.
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