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Beginner’s Guide To Different Business Structures

Beginner’s Guide To Different Business Structures

by Melvin · Jan 6, 2019

This is a guest post by Amanda Green.

Are you having that one idea and you think that everyone will love it? If you want to find out if your idea will actually work, there’s only one thing you can do: prove it. Building a business is your way to go. However, it must be a little overwhelming for some people to build their own businesses, especially those who don’t have prior experience. There’s a lot of business structures available and will answer some of your needs depending on your budget and how big you want your business to start. The three main types of business structures are a sole proprietorship, partnership, and corporation.

SOLE PROPRIETORSHIP

Sole Proprietorship is the easiest way to get your business running. It requires a smaller capital (it might be bigger depending on the kind of product you’re planning to make) and less legal requirements. Some states, like Pennsylvania, do not even require sole proprietorship to register their businesses. The sole proprietor will be the one shouldering all the hard work, thinking of all the ideas, implementing, and controlling every aspect of the business. This type of business structure is good for people with low-risk ideas who want to do this type of job for a long time while minimizing the tax and other potential problems.

However, sole proprietors will also be responsible for the debts that the business will incur if the business fails. It will also be harder for sole proprietors to gain funding.

PARTNERSHIP AND LLC

The partnership is the space between a sole proprietorship and the corporation. This is formed when two or more people decide to pool resources together in order to form a business. There are two types of partnerships: limited partnerships and limited liability partnerships. A partnership is a better option for people who are practicing professionals like a law firm or an accounting firm. It is better for testing an idea before jumping into a corporation. Partners will decide how they will divide the obligations, profits, and debts among themselves.

A limited liability company will let you get the best options from both the corporation and partnership business structures. This type of business structure will protect the personal properties of partners but will let your profits go to your personal income without corporate taxes.

CORPORATION (C, S, B, Non-Profit, and Closed Corporations)

Corporations are the biggest business structures available. They endure a higher risk, but they also swim in higher profits because of a higher market share and product coverage. Corporations can also get funding easier through IPOs and mergers. There are five kinds of corporations that address five different needs.

A C Corporation is the type of corporation that offers the strongest protection for personal assets. However, there are a lot of requirements and funding needed to build this business structure. C Corporations are known on being taxed twice, first is on income tax for profits, second is for personal tax returns to shareholders that will receive dividends. One of the greatest thing about this form is that it has a separate life from its shareholders. If a shareholder withdrew support, the company can still keep going even after a shareholder leaves.

An S Corporation, on the other hand, is a type of corporation that counters the double taxation occurring on C Corporation. This is done by allowing profits and losses to pass through personal income of shareholders. S Corporations can only have 100 shareholders at one time and all must be US citizens. You need to meet certain criteria to get the S Corporation status.

A B Corporation, on the other hand, works differently from C Corporation but is taxed in the same way. B Corporations are known to have both missions and drive for profit. One of their legal obligations is to give back to their customers via a contribution to public good.

A Closed Corporation is like the B Corporation but has traditions that are usually seen on smaller companies. Unlike B Corps, Closed Corporations are not permitted to partake in public trading.

Nonprofit Corporation is a corporation that does not carry profit as the main driver of existence. They solely exist in order to serve the public via their operations. Because of this, they are usually granted tax-exempt status.

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About Melvin

A blogger, basketball junkie, headphone enthusiast, aspiring chef, traveler wannabe and a big Taylor Swift fan.

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