So, you are all set to start your business after you are clear about what you want to trade in. But, wait have you decided upon the kind of business entity you will own? You must be familiar with the types of businesses before you kick-start your journey of entrepreneurship. Getting to know about the different legal forms of a business is crucial as it helps saving costs, figuring out tax liabilities and exploring growth prospects.
Three Types of Businesses
Broadly, there are three types of businesses divided into, Sole Proprietorship, Partnership, and Corporation.
Let’s have a separate look at each of these forms.
It is the simplest kind of the business. A sole proprietor is wholly responsible for all the profits, losses and liabilities. He/she owns the entity- Therefore, if a business goes bankrupt then creditors can go after the owner’s other personal properties to cover up the losses. Further, a sole proprietorship is simple mode and doesn’t involve too many legal complexities.
Newbies who are looking for small business ideas should start with a sole proprietorship.
As the name indicates this form involves an arrangement between two and more individuals. Liability on partners depends upon the nature of their partnership.
There can be a limited liability partnership or an unlimited liability partnership. In former, partners can be responsible to creditors for a limited sum of investment, in case of solvency. While, in unlimited kind, creditors and other relevant stakeholders can go after even personal assets of the partners.
This type of business is legally more complex than a sole proprietorship.
Among all the types of businesses, a corporation is the biggest form and legally more complex. A corporation can be a public and private entity, depending upon whether its shares are offered to the public or not. Its distinguishing feature is it’s being a separate entity from the owner. Mostly, there are limited liability corporations where creditors can go after only a fixed sum of the investment made by the owner in case of solvency. Otherwise, liabilities of corporations are different from those of owners. Investors own a company through a number of its shares they purchase. And, they receive the profit in form of dividends.
Further, corporations are also run by the board of directors who make decisions through voting and on behalf of stakeholders.
Startups who are looking for the ways to dominate the business competition must be cautious enough in choosing from right types of businesses.