Starting your own business is exciting, but it can also be a bit daunting to learn exactly where to start. Understanding the different types of businesses that you can choose from is an important first step.
Will you have a partnership, sole proprietorship, or non-profit organization? Which is best for the dreams you’re building? We’ll discuss the five most popular types of companies and how they work so that you can make an informed decision.
Choosing the Right Type of Business
You might be excited to get your business up and running, and such eagerness is usually a good thing. But you must take this first step of deciding on a type of business to be sure of the direction your company will take.
When you work on your business plan, you will determine many details about your company that defines its future. Relevant research and analysis will play a role in the type of business you choose, and you need to know what your options are.
There are more than 580 million entrepreneurs worldwide, and you’ll have to be ready to compete with some of them.
As such, a solid start will give you a higher chance of success, and you’ll be better prepared for any future challenges.
As an initial step, don’t forget that your business name is crucial to the success of your entrepreneurial dream. It represents your brand, product, and business identity. A good name is easy to read, understand, and remember. Consider using a good business name generator to get the perfect name for your business.
When you have the name of your business, there are several factors you must consider when choosing the type of business you want to run.
Here’s a look at the most important considerations you should keep in mind:
The kind of business you have should allow for maximum flexibility for the owner(s). Putting limitations on what owners are able to do can inhibit the growth of even a well-planned company.
You must not overlook the importance of knowing how protected from liability you are when starting your business. Before you can even start getting excited about the company, you must look at the potential risks to yourself.
Every type of company is run differently with varying levels of complexity. Some are a lot more involved than others, and it’s a good idea to look closely at every detail so you know what you’re getting yourself into.
The amount of control you want to have over the business is also an important factor to determine right from the start. Of course, the amount of control will affect how much of your time is dedicated to your company.
It is important to keep the right working hours that will result in a smooth-running business. For this purpose, business owners must get enough sleep. It’s something often overlooked by business owners. A good sleep routine is as important as a sharp business sense to manage change and growth in your business.
5. Capital Investment
Capital investment is inevitable, and you’ll either use your own money or seek outside financial assistance.
Investing in HR and human capital is also part of running a successful business. Learning from mentors and trained professionals will go a long way towards helping you make your business dream a reality.
Just like it’s important to remember factors such as HR management for an online business (or any business), you must know which type of company will be best for your goals and aspirations.
Most Popular Company Types to Start
We’ve got the considerations you must remember out of the way, so now we can dive into the most common types of companies and how they work.
1. Sole Proprietorship
As one of the most straightforward approaches to running a business, the sole proprietorship is a popular choice. It sees one person (or a married couple) taking responsibility for all of the business’s debts. That also means the sole proprietor gets all the profits.
For entrepreneurs who want to work alone and make all the decisions themselves, this is an excellent route to take. Another nice thing about a sole proprietorship is that expenses and income are included in personal income tax records.
The obvious drawback is that all the risk is squarely on your shoulders, and you take responsibility for anything that goes wrong. Personal assets can be placed at risk if the company has many debts to settle. If a legal claim is filed, you will be personally responsible as well.
Setting up a sole proprietorship business is relatively uncomplicated and won’t involve a lot of red tape. No registration is required (apart from location-specific basics such as business permits, etc.) so getting started is quick and straightforward.
Getting outside funding will have to take place through a bank or lending institution. It might be more challenging to obtain than financial assistance from partners.
- Easy to setup
- All profits go to the owner(s)
- Great for entrepreneurs who want complete control
- Owners are responsible for debt and legal matters
- Financial assistance is more difficult to get
Walmart is an example of a sole proprietorship. Source: walmart.com
Partnerships are perfect for entrepreneurs who want to have a business that is owned and operated by many. Responsibilities are equally shared between the involved persons. You can go for either limited partnerships or general partnerships.
Limited partners act as investors only and don’t control the business and how it is run. They also cannot be held responsible for any liabilities.
General partnerships, on the other hand, see partners assuming responsibility for debts. They have more input on how the business operates and must be involved in decision-making.
Limited partnerships are not recommended for new business owners because of how complex administration can get. If you want to have partners who help build the company, a general partnership will be good enough.
Partnerships don’t pay taxes on income, and losses and profits are passed on to the partners.
That means the company won’t pay taxes, but the partners pay for their share of income from the business. It’s a good idea to plan for taxes and ensure that all partners know where they stand.
This kind of company can be expensive to kick off since legal services and professional accounting is required. Partnerships must be registered, and you must establish an official name.
You will also have to get a business license and any other documentation that your country or state requires. The company must be registered with the IRS for tax purposes.
A great benefit of partnerships is that you can pool experience and resources to give the company a good start. Securing private funding will be easier, and the partners might be able to fund the company without outside assistance.
- Responsibilities and profits are shared between partners
- Experience and resources can be pooled
- No taxes paid by the company – that’s done by partners
- Might not be ideal for first-time business owners due to the complexity
- Can be expensive initially
- Lots of legal responsibilities, such as registration
Ben & Jerry’s is a great example of a partnership that worked out well. Source: Ben & Jerry’s Facebook
Corporations can be very complicated and expensive to get started. It calls for extensive record-keeping, reporting, and operations. While they are independent of shareholders, corporations give the best protection against personal liability.
This is a popular choice for major e-commerce companies such as Amazon and eBay. If you’re inspired by these companies and plan to have an online store, perhaps you’ll want to take the same route.
Corporations are highly scalable. There are many different avenues available for corporations, be it B2B or B2C, to grow their leads. The investors involved in them can also vary from just a few to up to 75.
A benefit that makes corporations popular is that they allow the company to trade stocks to obtain financial assistance. However, they are expected to pay taxes on all profits.
There are different types of corporations, such as B corporations, S corporations, A corporations, and C corporations. The most common type is a C corporation, and this type lets the business deduct taxes in the same way as individuals.
It also means the business owner will be taxed twice. However, this is a very common business structure and shouldn’t scare you off.
B corporations, also known as benefit corporations, are for-profit corporations (not to be confused with non-profit corporations) and are driven by profit and missions.
S corporations can have many shareholders (up to 75) so attracting more capital is easier. Director and shareholder meetings are regular to keep everyone up to date on what’s happening in the company.
You cannot take important decisions alone; shareholders must be allowed to vote and share their opinions.
A corporations are completely independent but still have shareholders. This kind of company is one of the most complex you’ll find.
Corporations can run for many years – it won’t risk getting closed down when one of the investors passes away or wishes to step away from the company. Ownership shares can be transferred to keep the company running.
- Company has unlimited life ran by shareholders and directors
- Liability is limited
- Ownership shares may be transferred
- Obtaining capital is easy
- Can be expensive to start
- Taxes can be applied twice
- Complicated to begin and keep running
Amazon is one of the most famous corporations in the world. Source: Amazon's Facebook
4. Limited Liability Company (LLC)
Starting an LLC can make it possible for owners, shareholders, and partners to limit risk to themselves. Their personal assets enjoy better protection since liability is lower.
Although this type of company is not incorporated, it can still enjoy the limited liability associated with corporations.
A limited liability company can be taxed as a partnership, corporation, or sole proprietorship.
There is no limit on how many shareholders an LLC can have, and there is greater flexibility on the distribution of profits. Losses and profits don’t have to be distributed in proportion to how much money an investor puts into the company.
This type of company is well-suited to first-time business owners because it isn’t overly complicated to get started. The paperwork involved is less than with corporations.
Typically, LLCs are not taxed as separate businesses; instead, losses and profits are moved to the members. The members have to report their losses and profits on a personal federal tax return.
A drawback of LLCs is that if a member leaves for any reason, it must be dissolved. The remaining members will have to take care of financial and legal obligations in terminating the business.
As an LLC owner, you must be careful about keeping your personal business separate from the company. Money must also be kept separate, and it’s important to keep separate records to avoid any legal issues.
- Very easy to get started
- Can have an unlimited amount of shareholders
- Personal liability is lower
- Flexible profit distribution
- Will likely be dissolved when a partner leaves
- Separate records must be kept at all times
Sony is a well-known LLC. Source: Sony.com
Non-profit companies are all about doing philanthropic work rather than being focused on profit or personal gain. Everything the company does is to benefit the public, so they are exempted from taxes on any profits made.
Non-profits follow the same rules as C corporations, but have some additional and special rules. Profit goes towards keeping the company running and active and is not meant to go to the owners or partners.
There is some extensive paperwork that must be filled out to establish a non-profit organization, and the company will be held responsible for all of its operations.
Funding for non-profit organizations can be limited and relies on the goodwill of others. This can make it challenging to keep things running.
- Tax exemption
- Emotionally rewarding
- No personal liability
- Limited funding
- Paperwork involved might be complicated
Save the Children is a popular non-profit. Source: SavetheChildren.org
Bring Your Entrepreneurial Dreams to Life
Now that you know the most popular types of companies, you can take your dreams of owning a business one step further. You can decide which type will suit your plans best and build on that foundation. The future may be uncertain, but you can take it on knowing exactly how you’ll run your dream business.