Starting up a business involves a lot of hard work. There are many legal and financial obligations associated with running a company, and navigating the many types of business registrations is just one obstacle that all aspiring entrepreneurs need to overcome.
Classifications Of Businesses
A sole proprietorship consists of just one person, possibly with a spouse, who takes complete responsibility for the business. They are easier to start and are far more flexible than other types of business registrations. Unfortunately, personal assets are at risk if the business racks up a lot of debt. The profits of a sole proprietorship are factored into the owner’s income tax.
A partnership comprises two or more people who share responsibilities, and all partners pay taxes on their shares of the profits. Some partnerships have general partners and limited partners. Limited partners are never personally liable for the debts of the business, but they will lose their initial investment if the business fails. Limited Partnerships give the general partner sole management of the business and restrict any limited partners to a purely financial role. In Limited Liability Partnerships the general partner handles the business, and the limited partner may or may not take part in the activities of the business. A Limited Liability Limited Partnership may permit active involvement in the business by limited partners. LLLPs help protect the general partner from being personally liable for all of the debts accumulated by the business, but they are not permitted in all states.
Corporations consist of shareholders who purchase company stock. Shareholders can be individuals or groups, like other corporations. These shareholders receive a portion, or dividend, of the company’s profits. The corporation’s profits are taxed, and the shareholders also have to pay taxes on their dividends. Shareholders cannot deduct losses associated with the corporation. Corporations involve more legal and financial obligations, and they are also less flexible than sole proprietorships and partnerships.
S corporations must be domestic companies. There are still shareholders, but there cannot be more than 100 of them; furthermore, no shareholder can be a non-resident alien, a partnership, or another corporation. Certain corporations, like banks and insurance companies, cannot be S corporations. S corporations pass all tax obligations to their shareholders, exempting them from the double taxation that normal corporations experience.
Nonprofit corporations are usually charities intended to help others, and they may be classified as public interest or private groups. Charitable nonprofit corporations may need to register separately with the appropriate state authority. Nonprofit corporations are exempt from paying taxes because all of their profits are funneled back into the company.
Limited Liability Company
Limited Liability Companies are regulated by state law, so the specific guidelines for these businesses will vary by location. Depending on the circumstances, LLCs may be treated like sole proprietorships, partnerships, or corporations when tax time arrives. All LLCs should have a written agreement that outlines the details of the business, like how personal liability and profits are to be handled.