A business in its most basic form sells a product such as shoes, cars, and burgers, or delivers a service such as telephone, cable TV, and auto repair. The goal is to make a profit. Businesses use some combination of labor, equipment, and materials to produce products or services.
Here are the most common forms to set up a business organization, with a brief explanation of each:
Sole Proprietorship – A business owned by one person who is self-employed and has the rights to profits and is responsible for debts. The upside is full control, can sell whenever desired, and fewer regulations. The main downside is the owner is personally liable for all business debts, and it is harder to raise capital from investors. Most small businesses are organized as a sole proprietorship and will usually incorporate when the business grows in size.
Partnership – A business owned by two or more individuals who contribute funds and shares the profits and debts. Common Partnerships are accounting, law, consulting, and architectural firms.
Corporation – A business in which legally the owners are not personally liable for the financial obligations of the business. They can only lose the money they invest in the corporation. The investment is when they contribute money, or if applicable, when they buy stock in the company. A share of stock represents a share in the ownership. If the company is a publicly held corporation, the general public can also own stocks. Owners are not personally liable and a corporation is often referred to as a “legal person.” It can use the terms “Inc.” “Incorporated,” or “Company.”
Limited Liability Company (LLC) - A business authorized by state law. Although exact characteristics vary by state, the most common characteristics of the limited liability company are that it has:
1. Limited liability, that is, the owners of the company are not liable for more than the capital they have invested in the business.
2. Managed by members or managers, owners can be members or managers.
3. Limitations on the transfer of ownership.
LLC's are becoming an increasingly popular way to start a business because LLC's are generally a less complicated business structure than a corporation, and provide a significant amount of protection.