There are various kinds of companies that make up our economy today. Private, commercial, and family owned businesses are the main ones. Entrepreneur and small business are considered as being extremely successful in modern American society. These categories of companies can be classified into two main subsets: service companies and product companies. A service company provides a service to another party or the public in general. An example of this would be a plumber providing a service to home owners or businesses.
Product companies make and distribute goods to retailers or customers. Many corporations are product oriented. They may need to purchase large quantities of certain items from suppliers in order to create a large profit margin. Corporations may also need to distribute to other areas after their initial purchase. The products produced by these corporations then become commodities.
The third category is the sole proprietorship. This business model has emerged as one of the most common businesses in the United States. Several corporations and sole proprietors have grown out of this business model.
One of the best ways to classify your business is to consider it according to whether it will be a sole proprietorship to a partnership, a corporation, or a limited liability company. In most cases, a sole proprietorship will be required to file an individual tax return. However, the tax return will only be required if the business is active. Any revenue that the business generates should be sent to the individual tax return.
Some business structures fall into either of the two main types of corporations. Partnerships are formed between two or more individuals who are related to each other. Limited liability partnerships (LLPs) are formed between a main type of entity and one or more primary shareholders. Limited partnerships also can include one or more investment partners.
On the other hand, sole proprietorships are often described as a business structure in which a person is the sole owner of the business. A sole proprietor cannot have any employees and usually cannot have any investors. Sole proprietors’ business is considered separate from its owners and treated as if it were its own separate entity. All revenue from the business is attributed to the owners alone. There are some differences between sole proprietorships and limited liability partnerships that need to be explained.
Limited liability companies (LLCs) are registered corporations but have the same tax advantages and liabilities as corporations. Limited liability companies are established for specific purposes, such as investment, real estate, or retirement. Investors can buy shares of a corporation, which is generally treated as their company, and use the shareholders’ money to invest in other businesses. Larger amounts of investment can be made in a corporation, but this is not possible for smaller shareholders.
There are also other types of business structures, including general partnerships, limited liability partnerships, and corporations. Partnerships with IRS classification may not be as profitable as a sole proprietorship, because there are not the same capital gains and losses. Also, partnerships do not release equity to the partner, whereas sole proprietorships are liable for capital gain and loss regardless of whether or not their partners decide to sell the business. Business partnerships and limited partnerships are a great way to create substantial tax savings.
Limited liability partnerships (LLPs) and general partnerships (PGs) share several characteristics, with one difference: the profit or loss is split between the partners in the partnership, rather than the proprietor. Limited partnerships are an excellent choice for start-up businesses, because they allow limited liability. This gives owners less liability if their business tanks. However, the lack of liability limits can make partnerships difficult to control, as all partners are responsible for all debts and profits. General partnerships enjoy several advantages over limited partnerships, but are not ideal for large or international business ventures.
When creating a business from the ground up, you should consider creating a corporation. A corporation is considered a legal entity, and as such, it has the same tax benefits as other forms of business structure. A corporation can be run at a profit, whereas partnerships can experience losses depending on the success or failure of the partnership.
A partnership is best suited to small, medium-sized businesses that need the flexibility of general partnerships without the high level of liability associated with them. With limited liability, there are no business debts to be repaid, and profits are only split among the partners in the partnership. This allows entrepreneurs the freedom to conduct business in their own way, without having to worry about complying with other people’s business laws. The small startup cost of establishing a partnership as opposed to incorporating a business is also ideal for small businesses that cannot afford to finance the cost of an established corporation.