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Before opening your business, it is important to establish your business type. The needs of your business, its growth potential and partnerships all influence your business designation. Read more about which business type makes the most sense for you.
1. Partnership
For those partnering up with one or more people, a partnership model may be the best choice for you. There is the option of either a fifty-fifty split where all partners involved are equally responsible for the running of the company. This is categorized as a general partnership. The other option is a limited partnership where one person is in control of the day-to-day operations while the other partners provide financial backing with the hopes of receiving a healthy return.
Advantages to having a partnership include an increased chance of being accepted for a loan. If one of the partners has a bad credit history, the bank can, instead, use the partner with the better credit history to approve it. Partnerships, in general, are also pretty easy to start. A few things to expect include obtaining a business license, filing a Certificate of Conducting Business as Partners and writing up a business partnership agreement.
To alleviate some of the pressure and responsibilities from you and your business partners, enlist the help of Peter Dodge Hanover Research. Through research and analytics, they can improve your business's effectiveness.
2. Sole Proprietorship
A sole proprietorship is likely the best route if you prefer working solo. Examples of professionals who go this route include artists, hairdressers, daycare owners and tutors. Positives to a sole proprietorship include an easy startup, having access to certain tax deductions and a no-hassle closing if that, unfortunately, were to happen.
One downside to this designation is how you are financially liable for any hardships associated with your company. From a litigious customer to an unexpected financial curveball, you can be personally held accountable for these setbacks.
3. Limited Liability Company (LLC)
For businesses carrying greater financial risk, a limited liability company categorization makes the most sense. Unlike a sole proprietorship, an LLC title prevents you from being held financially responsible in the event of a lawsuit or company debt. Your personal finances are not affected as long your company didn't behave in an unlawful, negligible or unethical way.
With this designation, you have both financial protection and also tax benefits. You can file both profit and loss on your personal income taxes without having to file a separate return for your business.
4. Cooperative
Many business structures are owned by only a few. However, with a cooperative, it is owned by the customers, the employees and anyone else who is a member of the organization. Your local grocery store co-op is a great example of a cooperative. When you purchase a membership there, you are granted part ownership of the company.
Getting started as a cooperative involves a little more work than some of the other designations, but it also has many benefits. Some of these benefits include being eligible for federal grants, member cooperative earnings not being taxed and certain products and services being discounted.
5. Corporation
Once a business becomes a corporation, it is considered a completely separate entity from its owners. The business is then taxed separately and must follow certain tax laws. Those who run the company are also beholden to their stockholders.
Within this categorization are subcategories: C corporations, S corporations, B corporations, closed corporations, open corporations and nonprofit corporations. Make sure to research which subcategory best fits your business type.
One of the big advantages of this type of business is its strong financial backing. Multiple investors in the company equal more avenues for raising money in the event of an expansion or financial hardship.
It is important to put some thought and research into which business type makes the most sense for you. If you foresee a great deal of business growth, an LLC may make the most sense to limit risk. Or, if you want a business that is owned by its members, a cooperative may be the better choice for you and your business.