The most common types of business classifications in the United States are: Corporation, Limited Liability Company (LLC), Sole Proprietorship, and General Partnership. Each classification has its own sets of pros and cons in regard to complexity, cost, liability protection, and taxation. Picking the right business classification requires weighing the pros and cons of each one. In this overview, we’ll take a look at four of the most common forms of business classifications.
Partnerships are automatically created when more than two people engage in a business, as to which brings profits. A partnership classification gives the owners flexibility as well as simplicity when it comes to operating. When it comes to limited liability partnerships and limited partnerships, it can offer liability protection to a certain extent. A partnership can be formed just by making a handshake and statistics indicate that they often are formed this way. However, serious partners will have their arrangement cemented in the form of a physical agreement which is drafted by a lawyer.
Some of the advantages of this include:
- Each partner will share the profits of the company per their agreement
- Provides a simple design and flexibility that is akin to proprietorship
- Does not require funds to establish a partnership
Some of the disadvantages of this include:
- Each partner is liable for losses and debts acquired
- Selling the company can prove to be difficult and requires locating a new owner, especially if one owner is in disagreement with the other
- The partnership ends when one of the owners decides they want to end it
2) Limited Liability Company, LLC
This is the newest form of American business classification. As is the case with a limited partnership, LLC classification provides its owners with limited liability. It basically provides business owners with the advantages of corporations and partnerships which are combined in a limited liability company. This limits the liability the company owners will face for losses or debts. In this classification, the profits are shared by the owners while negating double taxation. The major disadvantages to this type of classification are that ownership may be limited depending on the state of which the business operates. Agreements have to be detailed and complex. Another major downside is that in the beginning stages, an LLC acquires high expenses as a result of legal and filing fees.
Corporations are essentially separate entities but are regarded as being one legal person. Corporation classifications can be further broken down into s corp vs c corp. What this means is that the revenue that’s generated from a corporation is taxed as the personal income of the business. However, any income which is eventually distributed to the corporation’s shareholders as dividends is taxed once more as the personal income of the company.
Some of the advantages of this classification are:
- Limits the liability of the owner for losses and debts
- All losses and profits acquired belongs to the business, not the owner
- Corporations can be transferred from one owner to the next quite easily
Some of the disadvantages include:
- Extremely expensive to establish and maintain
- Requires complex paperwork
- Taxed twice
Note: by getting a mentor to guide you through the most crucial part of establishing a legitimate business, they can guide you to the right classification that falls in line with the lifestyles you wish to live and goals you want to accomplish.
4) Sole proprietorship
Statistics indicate that this is the most common type of classification. Sole proprietorship entails a company that is run by a single individual for their own profits. Sole proprietorship companies run on the owner’s directions and decisions. As such, once the owner dies, so does the company.
Some of the advantages of this type of classification include:
- 100 percent of the profit goes to the single owner
- Less regulation than other business forms
- Sole proprietorship status gives owners the most flexibility when it comes to running their business as opposed to other types of businesses such as corporations
- Only requires a business license to get started
The reality of the fact is that you may gravitate towards a business classification that you may think is ideal for your company, only to realize you made a grave mistake beforehand. Many experts proclaim that a vast majority of businesses fail because they didn’t choose the right classification, such as to enter into a partnership with someone who ultimately brought the company down.
Make sure you understand all of the classifications before you go into business. You want to start off your business in the right direction.