Starting a business is tough. There are lots of things to think about—the industry landscape, your market, finding the startup cash you need—and which type of business is best for you is no less important a decision.
Let’s take an overview look at four of the most popular types of business—sole proprietorship, general partnership, llc, and corporation—so that you can get yourself off to the right start and select the best type of business for you!
A sole proprietorship is the simplest type of business you can form. Just as it sounds, it’s a business made up of just one person.
There are two main types of sole proprietorships that you’ll need to be aware of if you’re going this route. The first is ultra-simple: it’s just one person operating under his or her legal name. (You’ll need to use your social security number to report your earnings to the IRS, of course.)
The other type of sole proprietorship is a DBA (“doing business as”—see?), in which you can use a name that isn’t your own legal name. For example, I could register a business called Sarah’s Writing and Editing Services, but since that isn’t my real name (my parents were not, in fact, Mr. and Mrs. Writing and Editing Services), I would need to formally register a DBA with my local authorities.
Why? There are many reasons, including public disclosure and regulatory issues, but one of the more practical reasons is that in order to cash a check with your bank, it has to have your name on it. If it doesn’t, you’ll need a bank account under the business name—and in order to do that, you’ll need to register your business!
The thing to remember with a sole proprietorship is that the business and the owner are one and the same; there is no legal separation protecting the owner from debts or obligations of the sole proprietorship.
[For information on other types of DBAs and the different terminology used around the country, take a look at the information on Trade Names by ClickAndInc.com.]
A general partnership (not to be confused with a limited partnership, which is a story for another time) is essentially a sole proprietorship, but with two (or more) proprietors rather than one.
Other than the difference in number of owners, much holds true for both: it is a very simple kind of business, one that is not legally separate from the owners, and formal registration is required in order to open a bank account.
Something to keep in mind with the general partnership is that each partner has equal control over the business—and both are equally liable for it. If one partner makes a decision that bankrupts the business, both partners are equally responsible for any debts or obligations.
[If a general partnership does not meet the owners' needs, you might look into a limited partnership, which has different "tiers" of partners; for more information, check out the great information on limited partnerships by NOLO.]
LLC (Limited Liability Company)
An LLC, which stands for Limited Liability Company, is a type of business that (as its name suggests) does provide limited liability protection to the owner or owners; if the LLC defaults on a loan, for instance, the owners’ personal assets are not seized to pay for them, provided they have acted within the scope of the law.
A limited liability company will be managed by members or managers—an important distinction. These managing members or managers are analogous to corporate officers, and they will make the decisions that dictate the day-to-day operations of the LLC.
[For more information on preventing the courts from seizing owners' personal assets to pay for debts and obligations of the business, check out our 8/24/11 post on Piercing the Corporate Veil.]
A corporation, like a limited liability company, protects the owners against debts and obligations of the business. It also allows shares of stock to be sold to raise capital.
As mentioned above, a corporation is managed by its corporate officers, as well as a board of directors. It can choose between two different types: S Corporation or C Corporation.
[For more information on corporations and the different organizational structures, please visit our "LLC , S Corp, and C Corp" comparison.]
Ready to register your business? Click&Inc can get you started!