A business is defined by the Internal Revenue Service as an entity or person conducting business. Businesses may be sole proprietorships, partnerships, corporations, limited liability companies (LLCs), or any other form of business entity recognized by the IRS. Examples of businesses are businesses found on Main Street, such as bakeries, car dealerships, and restaurants; professional services such as law firms and doctors’ offices; educational institutions such as colleges, universities, and schools; franchises owned by individual entrepreneurs; government organizations such as the IRS, state, city, and county agencies; international corporations such as those listed on the New York Stock Exchange; nonprofit organizations such as the Red Cross, World Vision, and the Salvation Army. A corporation is considered a separate legal entity from its owners, so all of the corporations together are treated as one entity for tax purposes. The only exception to this rule is when a corporation owns assets that are held by stock holders.
The majority of businesses are formed as either sole proprietorships or partnership. Each has their advantages and disadvantages. A sole proprietor is generally the most common form of business formation and is recognized by the IRS as a separate entity from its owners. This allows the business owner to control their business solely through them, avoiding liability to anyone else. Because they are the only parties with ownership stake, sole proprietors are able to deal with greater personal taxes and asset restrictions than partnerships due to their reduced liability.
On the other hand, a partnership is a type of business structure that consists of two or more separate entities joined together for the purpose of working towards a common goal. Partnerships may share in the cost of startup, property investments, and the risk of loss through the operation of the business. If one partner dies, other partners are liable only for his or her share of the business. Partnerships are popular in many types of businesses because they often result in substantial long-term profits.
Many businesses incorporate as either corporations or LLCs. A corporate entity has the same legal rights and privileges as any other business. It can issue shares, make loans, invest, and enter into contracts. Unlike sole proprietorships, partnerships need to have one or more people hold the majority share of the business in order to be considered legally separate entities. The disadvantage of corporations and LLCs is that they are very difficult to liquidate without damaging the business, shareholder’s equity, and assets.
There are also three other common types of business entity structure which vary greatly depending on the nature of the venture. One is the share-based business, which has one or more shareholders that contribute to the value of the company. The company uses their capital to hire employees, buy raw materials and supplies, and make purchases to expand their operations. When these shareholders divide the profit and losses between themselves based on their contribution, the company maintains a healthy cash flow.
Another common business structure for small businesses is a limited liability company or LLC. This form of business organization allows business owners to limit their personal liability while personally controlling their corporation. For instance, the owner of the LLC can shield himself or herself from personal lawsuits by putting the LLC in place. Limited liability companies do not share in the profits and losses of their owners, so they are not susceptible to the vagaries of the stock market. Also, limited liability companies are completely transparent, have no double taxation, and are exempt from most federal and state taxes.
The last type of business structure is a partnership. A partnership is often used by new businesses that may have limited capital funds. In order to be a partnership, both partners must contribute equal shares to the partnership. Once the partnership is created, each partner generally owns a portion of the partnership’s equity. Because the business owners control the partnership, there is a good deal of leverage that partners can use to their advantage.
Limited partnerships offer many advantages over other business structures. If you are looking to start a new business, consider one of these business name structures. You will have considerably less financial risk than if you choose to start your business as a sole proprietorship or a corporation. Additionally, you will have more leeway in determining the nature of your business and how it gets organized.