The Business of Business Part 2
Types of Business to Make a Profit
If you’re reading this, chances are you did all your research and homework that was suggested in Part 1. You have determined that your business can make a profit. Next, you evaluated your market. Then, you have identified your competition. Wow! And you are still here… GREAT!
Then, Let’s move onto Part 2.
Which Entity is right for you?
This will be the gravest and foremost question you need answered before taking that first step into the business world. What type of structure will meet your needs?
Now, let’s ponder and analyze the most popular types of businesses. These top entities are merely open-ended suggestions to consider. And, by no means, the only options available to you.
This information is presented here for your general knowledge of the various ways you can structure your business. Therefore, this information addresses the financial and legal portion of your business.
The savvy entrepreneur will follow up by seeking a professional accountant and legal counsel. A counsel’s expertise which parallels with their chosen structure.This information is presented here for your general knowledge of the various ways you can structure your business. They address the financial and legal portion of your business. #biztips Click To Tweet
4 BASIC and MOST COMMON types of businesses:
A business owned by a single person. There is no legal or financial difference between the business and the owner.
- Owner keeps ALL the profits.
- Quick decision making.
- Easy to manage.
- No consultation needed.
- Owner answers to no one.
- Flexibility with changes in products, financial decisions etc.
- Easy to start. Little paperwork to establish business.
- Owner is responsible for ALL LOSSES.
- Unlimited Liability. ALL of the owner’s personal assets can be sold to payoff business debt.
- An owner can be sued.
- Owner pays personal income taxes on ALL profits.
- Bad business debt affects owner’s personal credit rating.
A business owned by two or more people who share responsibilities. General partner(s) run the business. Hence, they contribute money to raise capital to launch the business. All partners are decision makers.
Some partners may contribute different percentages into the partnership. And then, some partners may serve in different capacities.
- Easy to start. Does NOT involve as many legal procedures as other entities.
- Requires less capital than a sole proprietor. Partners invest equally or proportionately. The investment ratio determines the percentage of profits.
- Consultation opportunity between partners provides different opinions on issues.
- Quick decision making without long meeting discussions. A phone call, text or email can solve issues quickly.
- Unlimited Liability. ALL partners’ personal assets can be sold to payoff business debt.
- Bad business debt can affect ALL partners’ credit rating.
- Internal conflict. Partners may fail to agree on the practices, ethics and vision of the entity, thus causing issues.
- EACH partner shares in the burden of paying personal income taxes on the profits.
A fully independent business with shareholders who elect a board of directors to oversee the day-to-day operation of the entity.
- Owner has limited liability whereby their assets are safe. Which means they are untouchable by creditors in the event of failure.
- Lower taxes because the owner and business share the profits.
- (Sometimes) Benefits may be deducted as business expenses.
- Corporate ownership is transferable. In the event of foreseeing bad times, the owner can sell the corporation and avoid losing their capital investment.
- Expensive to set up.
- Multitude of legal paperwork.
- Must file ownership with Secretary of State.
- Corporation operates as a separate legal entity, hence it pays taxes.
- Slow decision making. Need to consult the directors before making changes and decisions.
Limited Liability Company (LLC):
An LLC is structured in such a way as to protect your personal assets. Therefore, (Generally speaking) the officers are not libel for the debts of the corporation.
Consider this a hybrid entity. It is a mixture of a sole proprietorship or a partnership AND a corporation. Also, it is designed to make it easier to start small businesses. (Note: a limited partnership would be commonly referred to as an LLP, in lieu of an LLC).
Additionally, an LLC has exclusive rights to own company assets, to sue or to be sued. The taxation formula is like a corporation. But its members have a single taxation process like a partnership.
Therefore, it has no stocks. The owners are members and NOT stockholders. As a matter of fact, members work under an “operating agreement” requiring members to meet at least once or twice a year.
- It’s a single taxation system. The LLC does NOT pay taxes. They are “passed through” to the members who pay the taxes under their personal income.
- Liability PROTECTION. Members have limited liability. Members assets CANNOT be taken away to payoff business debt.
- More capital investment is required.
- There is more paperwork required.
- More legal procedures are required.
Making the Decision for the Business of Business
These are merely the 4 basic examples of the most popular types of biz structures. Therefore, within these basic forms of businesses are numerous “spinoff” entities.
Consulting an accountant and/or attorney can provide additional details and advice. They can guide you on others that are more pertinent to your type of biz. Also check tips to help you deal successful with the IRS. After all, if you want profits you must know how much you will owe in taxes.
Consider this information as a simple guideline to help lead you in the right direction. Keep in mind that the entity you select today may not be finite.
You can begin your company as one type of structure. Then, once established, you can transfer it into another structure. As your venture changes and grows things change. However, you must start somewhere.Consider this information as a simple guideline to help lead you in the right direction. Keep in mind that the business entity you select today may not be finite. #biztips Click To Tweet
Things to Ponder 🤔
- How much working capital will you need to get this entity off the ground?
- Do you know how much liability are you willing to risk in the event of failure?
- How much time, effort and energy are you willing to contribute to make this legal entity successful?
Now, it is time to begin making important strategic decisions. Hence, ponder these three questions carefully. Jot down the answers. Then, read them back to yourself.
Finally, does it make sense? Seeing it on paper, steering back at you, will help put things into perspective. It will make it easier when making your company structure selection.
Now, It’s time to spread your wings and fly. Lastly, I’d love to know which one of these structures you are in with your business.