Types of Business Structures
Sole Proprietorship vs. Corporation
A sole proprietorship is a business run by one individual. The sole proprietor is the business owner. It differs from a corporation in that a sole proprietor is liable for his or her business debt. If the business encounters financial issues, creditors can turn to the business owner and the owner’s assets for restitution.
Simply put, the business is the individual. He or she may enter into legal agreements, manage finances under their name, as well as be personally liable for lawsuits.
Unlike a corporation, a sole proprietorship has no long-term existence and dissolves upon the death of its owner. Taxes for the business are recorded on the sole proprietor’s tax return and they may have difficulty securing funding because there is no equity to impart in exchange for capital.
Partnership vs. Corporation
A partnership is a business owned by two or more partners. There are three different types of partnerships:
In general partnerships
, all partners are liable for the business’s debt and obligations unless a Partnership Agreement
states otherwise. Furthermore, partners share equally in profit or according to their share of equity. They also make decisions, sign agreements, and conduct business as a team.
Limited partnerships are made up of general partners who have unlimited liability in the business and make all of the company’s day-to-day decisions, and one or more passive investors who fund the business but do not take an active role in running the business nor incur any liability for the company’s debt.
Limited liability partnerships are similar to general partnerships, but protect all of the partners from the negligence of their partners. This type of partnership prevents an individual from being sued as a result of their partner’s actions. However, they are still responsible for their own actions or negligence in the business.
Partnerships are not taxed on the company’s income, but each partner is taxed on their individual share of business profits. The losses are divided amongst the partners and applied to each partner’s individual income.
Unlike a corporation, a partnership may be dissolved if one or more partners decides to withdraw.
Most businesses begin as sole-proprietorships or partnerships, and eventually incorporate to protect the owners.