Looking to start your own business? Congratulations! You're onto something big — entrepreneurs like yourself are fueling the economy. To help you get started, we'll explain the seven most common types of business. If you're starting your own business, you'll want to create a business plan to help you better outline your goals before committing to one of the business types below.
What type of business should you start?
One of the first challenges new entrepreneurs face is deciding what type of business they should register. Although there are several different types of businesses, choosing one doesn't need to be difficult. Here are the 7 most commonly-used business types and some questions to help you pick which business type is right for your startup.
The 7 most common types of businesses:
- Sole Proprietorship: The simplest type of business. Sole proprietorships are owned by a single person and are very easy to set up.
- Partnership: A business owned by two or more people who share responsibilities and profits.
- Limited Partnership: A type of partnership with investors. General Partners run business operations, while Limited Partners provide investments.
- Corporation: A fully-independent business with shareholders. Requires a lot of work to set up.
- Limited Liability Company (LLC): A mixture of a partnership and a corporation, designed to make it easier to start small businesses.
- Nonprofit Organization: A business that uses its profits for charitable purposes. Can be tax-exempt.
- Cooperative (Co-op): A business owned and operated for the benefit of the members of the organization that use its services.
A sole proprietorship is one of the most popular business structures, namely because it's one of the simplest and only requires a single person to create. In a nutshell, a sole proprietorship is a business that's owned and operated by just one person. The nice thing about a sole proprietorship is that you don't have to fill out any forms or go through any legal procedures to declare this type of business. Instead, just by owning a business on your own, a sole proprietorship is automatically associated with your new business. Keep in mind, however, that depending on your product or service (and your location), you may need to access a specific license or other documents. Sole proprietorships are the most common type of online business due to their simplicity. An important thing to note is that there isn't a legal or financial distinction between the business and the business owner, which means that you as the business owner are accountable for all of the profits, liabilities and legal issues that your business may encounter. If you're starting an ecommerce business by yourself, a sole proprietorship is probably the best type of business for you. If you're starting a business with one or more partners, keep reading!
Two heads are better than one, right? If that's the philosophy behind your business structure, then a partnership might be the best choice for you. A partnership might be appropriate if your business is owned by two or more people. Keep in mind that with this type of business, business responsibilities, including financial and legal, fall upon each business owner. Depending on how the ownership is divided (either equally or not), there are different types of partnerships for you to explore from a legal standpoint. With that being said, a partnership does require that you register your business with your state and establish an official business name. After that, you'll then be required to obtain a business license, along with any other documentation that your state office can help you with. Beyond that, you'll also need to register your business with the IRS for tax purposes. Although this may seem like a complicated process, there are lots of benefits to a partnership, so if you're looking to have a co-owner, don't be afraid to go for it - many online companies are formed using partnerships. Having someone to help share the work of starting a new business is definitely worth the extra paperwork.
A limited partnership, or LP, is an off-shoot version of a general partnership, and while it may not be as common, it's a great bet for businesses who are looking to raise capital from investors who aren't interested in working the day to day aspects of your operations. With a limited partnership, there are two sets of partners: The General Partner and the Limited Partner. The general partner is usually involved in the everyday business decisions, and has personal liability for the business. On the other hand, there's also a limited partner (typically an investor), who is not liable for debts and don't partake in regular business management of the company. Just like a general partnership, if you enter an limited partnership agreement, you'll need to register your business with the state, establish a business name, and inform the IRS of your new business. Again, this option is the most common for those looking for investment dollars, so keep that in mind when exploring your partnership options.
A corporation is a fully independent business that's made up of multiple shareholders who are provided with stock in a the business. Most common is what's known as a "C Corporation," which allows your business to deduct taxes much like an individual - the only problem with this is that your profits will be taxed twice, both at the corporate level and at the personal level. Don't let this fact deter you, however - this is extremely common, and if you currently work for a company with multiple employees, that's likely the business structure they're using. Most likely, if you're starting off as a smaller business, particularly one that only operates online, declaring yourself as a corporation wouldn't be appropriate. However, if you're already an established business with several employees, listing your company as a corporation might be the correct move. You'll need to file very specific documents with the state, followed by obtaining the appropriate business licenses and permits.
Limited Liability Company (LLC)
Next on our list of business types is a Limited Liability Company, better known as an LLC. An LLC is a newer type of business that is a blend between a partnership and a corporation. Instead of shareholders, LLC owners are referred to as members. No matter how many members a particular LLC has, there must be a managing member who takes care of the daily business operations. The main difference between an LLC and a corporation is that LLCs aren't taxed as a separate business entity. Instead, all profits and losses are moved from the business to the LLC members, who report profits and losses on a personal federal tax return. The nice thing about pursuing an LLC is that members aren't personally liable for business decisions or actions of the company in question, and there's far less paperwork involved in creating an LLC as compared to a corporation. LLCs are another of the most common types of online businesses, since they allow small groups of people to easily form a company together.
A nonprofit organization is pretty self-explanatory, in that it's a business organization that's intended to promote educational or charitable purposes. The "non-profit" aspect comes into play in that any money earned by the company must be kept by the organization to pay for its expense, programs, etc. Keep in mind that there are several types of nonprofits available, many of which can receive "tax exempt" status. This process requires filing paperwork, including an application, with the government for them to recognize you as a nonprofit organization. Depending on the parameters of your new business, they'll be able to tell you which category you best fall under.
The last on our list is what's known a cooperative, or a business that's fully owned and operated for the benefit of the members of the organization that use its services. In other words, whatever is earned by the cooperative is then shared among the members themselves, and aren't required to be paid out to any external stakeholders, etc. Unlike other types of businesses, which have shareholders, cooperatives sell shares to cooperative "members," who then have a say in the operations and direction of the cooperative itself. The main difference in the process of becoming a cooperative, as opposed to the other types of businesses listed, is that your organization must create bylaws, have a membership application and have a board of directors with a charter member meeting. This is one of the least common types of online businesses, although online cooperatives do exist.
There are a number of good resources that outline and define them, such as this one.
Choosing the right kind of businessTo choose from among the different types of businesses, first ask yourself a few basic questions:
- Are you starting your business alone, or with a partner/partners? If you're starting your business alone, consider a sole proprietorship. If you have partners or investors, consider a partnership or limited partnership or an LLC
- Do you want to register your business with minimal paperwork? Sole proprietorships and LLCs are easy to set up, while corporations, nonprofits, and partnerships require more paperwork.
- Do you want to keep your business and personal finances and taxes separate? If you want to report business taxes on your personal tax returns, choose a sole proprietorship or LLC. If you want more distance between your personal and business finances, consider a partnership or corporation.
- If you have a partner or partners, how much responsibility will they assume? What will their role(s) be in your business? If your partner(s) will be active in daily business operations, choose a regular partnership. If they're just investors, consider a limited partnership.
- Do you have employees, or plan to hire additional employees? If so, you may want to register a corporation.
- Are you starting your business for profit or to help a cause? If you're just concerned with helping others and aren't seeking a profit, forming a nonprofit can grant you tax-exempt status - although there's a lot of paperwork required.
- Will your company be owned and operated democratically by its members with no single owner? If so, you'll want to form a co-op. This type of business is rare, however.
After you've answered these questions and have decided which type of business is best for your startup, the next steps are dependent on your state and local laws and ordinances, as you may need to fill out additional forms specific to your location and type of business. There are a number of books and resources for this. Many of them recommend using the Small Business Association as the starting point since they maintain local offices. Finally, check your local and state laws regarding running a business out of your home, as zoning laws can sometimes be an important factor in deciding which type of business you want to create.
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