The term business refers to any set of activities undertaken to earn a profit. The profit is calculated using the cost of capital as the operating cost and revenue generated from sales. There are four basic business models – single proprietorship, partnership, sole proprietorship and limited partnership. Each has its advantages and disadvantages.
Sole Proprietor: The easiest among business types. It involves selling and distributing goods or services directly to customers under the name of only one person. It is simple in theory but difficult in practice. To protect profits, sole proprietors are required to register each sale and purchase with the state. Sales are recorded by county clerks, and the state taxes payments are passed on to the owners.
Limited Partnership: A business relationship wherein two or more persons share profits and responsibilities. It is like a corporation without voting rights or the ability to dole out shares. Partnerships must be registered together as well as the state. Income is reported separately for each partner and all earnings and expenses are included in the partners’ income taxes. Limited partnerships have some advantages over sole proprietors, which makes them the best option for many small business owners.
Limited Liability Company: The other popular business type is a Limited Liability Company (LLC). An LLC is a legal entity separate from its owners. It is not controlled by anyone and has limited liability. LLCs are established for specific purposes, such as to avoid personal liability for debts of the business or to pay taxes at the hands of the owners. Unlike a sole proprietorship, the liability of the LLC is limited to those for whom it is created and not necessarily to the entire business.
There are many advantages and disadvantages to all three business types. One advantage to an LLC is that it can be set up quickly, usually within days, and costs less than most small businesses. It is also a very flexible option, allowing partners to hire employees and manage their business structure themselves. An LLC is not attached to any one individual and can exist in different names. Because of these features, an LLC is a good choice for many small businesses. The only major disadvantage of an LLC is that it does not provide the same protection from lawsuits as do sole proprietorships, the reason why many choose sole proprietor over an LLC.
Sole Proprietorship: A partnership is another popular business structure, this time over a single asset. This type provides many of the benefits that an LLC offers, like unlimited liability, taxation benefits, and is not domiciled. However, an LLC is not created with the need to protect personal assets, unlike a partnership. This means that the personal assets of a partner are not protected in the partnership, and if the partnership itself gets sued, there is no guarantee that the personal assets of each partner will still be protected.
Limited Liability Company: Also known as a limited liability corporation, a LLC is a hybrid of the two business structures mentioned above. The main difference between a LLC and a sole proprietorship is that in an LLC, one person owns all of the assets while in a sole proprietorship, only one person owns all of the assets. This makes it easier to limit liability, since if a person owns the business, they alone are protected from personal liability. Also, in a limited partnership, the owner shares in the profit, while in an LLC, the profit is solely the owners own. In this way, a limited partnership is more similar to a sole proprietorship in the way that it operates, allowing for maximum flexibility.
As you can see, there are many business types to choose from when starting a business, and each has its advantages and disadvantages. Therefore, it is important to do your research in order to select the best business types for your needs, no matter what those needs may be. You can easily look up information on the popular nonprofit organization business types, or even look up information on the most common types of businesses in other fields to see how each type works.
