Whenever you want to start a business you need to know about all pros and cons of business has. There are many types of companies and structures of the business you can choose from. Each one has its pros and cons lists like the complexity of formation, tax implications, and liability protection.
Here is a list of types of companies. If you are not sure what kind of business you want to start then consult a qualified professional. However, hope my article will help you to decide your business plan.
Lots of entrepreneurs start with a sole proprietorship or general partnership (and after that according to their potential they switch to different structures). It is one of the simplest types of companies that an entrepreneur can start. You don’t have to do anything to start a sole proprietorship (except you need a license before you can start a business). You don’t need to take any formal steps or complete any filing to start a sole proprietorship.
A sole proprietorship considered to be a part of a legal entity from its owner. The legal name of the business is your name; also its profits and losses are the part of your tax return. Business debts and lawsuits are the personal liability of sole proprietors.
Sole proprietorship pros
- Easiest and least expensive business entity.
- The full control of the business is in the hand of sole proprietors, they may make their own decisions (within the law of nation).
- You can easily change your business entity from sole proprietorship to any other type in the future.
Sole proprietorship cons
- Unlimited liability: Only the owner of the business is personally liable for all the debts against the sole proprietorship.
- It is not easy to raise funds for sole proprietors because of unlimited liability.
- After the death or retirement of the owner, the business entity will dissolve upon.
It is a type of company in which two or more people agree to share in all liability and assets of a business. With a general partnership, the law does not distinguish between the business and its owners (just like a sole proprietorship). Each owner has unlimited personal liability as well as the full authority to conduct business for the partnership.
You don’t have to be compelled to file documents with the state to create a business, however, you may have to be compelled to get associate EIN (employer ID number) as your tax ID and plenty of states need that you simply register your DBA (“doing business as” name). Most partnerships additionally produce a written partnership agreement with details on however you’ll build selections, resolve disputes, and assign profits and losses.
General partnership pros:-
- Costs of start-ups are less.
- Pass-through tax treatment: Like during a sole proprietorship, no taxes are paid at the business level. Instead, the individual partners are taxed on the income they receive from the partnership. Each partner pays taxes on their share of the business income on their tax returns.
- Regulation is limited.
- The base of management is broader and financing is flexible.
General partnership cons:-
- Unlimited liability: all debts against the business are the personal liability of the partners.
- Authority is divided amongst partners.
- Sometimes it is difficult to raise the fund.
- After bankruptcy, withdrawal, or death of any partner may lead to the shutdown of the business.
A note on other partnership types
In addition to general partnerships, you can also form limited liability partnerships and limited partnerships. These types of companies are generally more complex to make than a general partnership, and that they offer liability protections that general partnerships don’t.
Limited liability companies (LLC)
LLCs are the foremost flexible of all incorporated business entities. They’re a comparatively new sort of business structure that’s specific to the US. An LLC is more complex to make than a general partnership but is often easier to make than an organization.
LLCs are a legal structure that’s governed entirely under state law, instead of a federal tax structure. Meaning LLCs can prefer to be taxed sort of a corporation or to possess pass-through taxation sort of a partnership or sole proprietorship.
• LLCs have great organizational and managerial flexibility.
• The liability of a member of an LLC is restricted to the member’s personal investment within the company.
• LLCs offer the power to settle on your tax structure.
• LLCs don’t need to follow a number of the company formalities that apply to corporations.
• LLCs tend to possess a way more complex tax file systems than other entities.
• Tax and liability treatment of LLCs isn’t uniform across state lines.
There are two sorts of corporations (C corp. and S corp.).
Both C corps and S corporations are legal entities that are separate and distinct from its members (shareholders). A corporation can acquire assets, enter debt, enter into contracts, sue, or be sued. Ownership interests during a corporation are usually easily changed. Shares could also be transferred without affecting the corporation’s existence or continued operation.
The primary difference between C corps and S corps is the way they’re taxed. S corps are a “pass-through” business which means the profits and losses are passed through to the shareholders’ tax returns. C corps are taxed as a separate entity before the funds are disbursed to employees and shareholders, where they may be taxed again (this is referred to as “double taxation.”
Businesses do need to meet specific requirements to be eligible for S corporation.
• Limited liability.
• Possible tax advantages.
• Ownership is transferable.
• It’s easier to raise capital.
• It is the most expensive form of business to assemble.
• Possible double taxation of profits for C corps.
• Time consuming and costly corporate formalities should be continually observed e.g. annual shareholders meetings, periodic board meetings.
• Corporations are monitored by federal, state, and some local agencies, and may have more paperwork than other types of companies.
It is possible, down the road; to convert your companies into a special entity so don’t worry an excessive amount of about being cursed with your decision. That said, it’s worth sitting down and brooding about your financial projections and goals (and possibly meeting with a lawyer or finance professional) to work out which business structure goes to be most helpful for your business immediately.
As an entrepreneur, you ought to bear in mind that while selecting the right sort of business is a crucial business decision there’s no fixed formula for doing so. Several things like liability implications, the requirement of raising funds, size of the organization, compliance requirements, tax implications, etc. have to be considered before zeroing in on an appropriate business form. Another important factor that ought to motivate your choice of business is whether or not you would like to avail of the advantages of the Start-Up India Plan- a Government initiative to encourage start-ups, as only start-ups found out as private limited companies, LLCs or partnerships qualify under the Plan.
As you’ll see, the business structure you decide on can have a big result on your business itself.
When you’re creating a call, trust your business’s growth — each past and future. If you’re within the early stages, a structure supposed for smaller and less complicated businesses is probably going the thanks to going… however, if you’ve got unbounded ambition and you’re poised to scale quickly, you would possibly be at an advantage selecting an additional complicated structure designed for larger businesses. Conversely, if your business is meant to remain little (regardless of its success) and doesn’t notably want or need investors or shareholders, you’ll doubtless need a business structure that’s simple to form and manage.
Also, bear in mind that the correct structure for your business wills modification over time. Most folks begin with a sole proprietary or partnership before forming associate LLC or corporation, and a few business homeowners attempt many completely different structures before they notice the correct work. Though dynamic your business structure takes work, it’s a possibility associated with traditional steps for an evolving business to require.
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