There are a number of ownership structures for entrepreneurs to look at before starting their small businesses, each with unique advantages and disadvantages fit for different types of owners and industries.
So much of how your firm is run will depend on the ownership structure that you choose for it, so it is important to know exactly what you can get out of each kind. And don't worry too much, if you choose the wrong ownership structure the first time around you will be able to change it. This is a decision that will impact the amount of control you have, the liability of your small business and the way that you pay taxes though, so don't take it lightly. For advice to help you choose an ownership structure for your small business, read about the different types below:
1. Sole proprietorship
This is the most common type of ownership structure for small businesses. This type places a single person fully and legally in charge of the business. You don't need to do anything special to enter into sole proprietorship, you just start doing business. Speaking legally, a sole proprietorship and its owner are inseparable, you are one and the same. This means that though you are in total control, you are also liable for everything, such as debts or a lawsuit against the business. Despite the liability issues though, this is the form of ownership with the least red tape, making it fairly simple as long as you can avoid being sued by a customer.
A partnership is similar to a sole proprietorship, except it is a business owned by two or more people, rather than a single person. In this sort of ownership structure, responsibilities are divvied through an agreement struck between the partners. Each owner in a partnership pays taxes that are proportional to his or her share of the business income. Liability for debts and court judgments is also shared between the owners in a partnership. A major benefit of this sort of ownership structure is the opportunity to take advantage of another person's experience. It can prove helpful when you have another person around to pool resources with. However, it may be difficult for some people to consistently have to make joint decisions, rather than take full control.
3. Limited liability company
LLCs offer protection for the ownership structure, members of which are made safe from personal liability for business debts. This sort of structure also offers the same sort of pass-through income tax benefits of a partnership. LLCs, like the yet-to-be-mentioned corporations, are useful for business owners in an industry that comes with the expectation of a few lawsuits throughout the lifetime of the firm. LLCs can be considered something like a best of both worlds situation, with a more beneficial tax status than corporations and better liability protections than sole proprietorships or partnerships. However, LLCs take some work to set up and may be less likely to draw funds from an investor than other ownership structures.
A corporation is a completely separate legal entity from the owner, able to be taxed and sued, in addition to being liable for debts. This means that profits don't flow directly to the owners. Rather members of the ownership structure receive income through salaries, bonuses or dividends on their personal tax returns. While there are certain situations in which owners can be held responsible if the business falls into debt or is sued, for the most part liability lies solely with the corporation. One drawback is the complexity of this sort of structure, which can be difficult to set up. In addition, owners can be subject to double taxation.
If the above guide hasn't made the decision for you, then speak with a financial services expert in order to determine the best ownership structure for your small business going forward.