While starting a business can be a difficult endeavor, it can also be very rewarding. Watching all your dreams come true can feel incredibly fulfilling, and you’re excited to see where your business will take you.
However, the success of any business starts with having clear goals and strategies. One of the most critical aspects of setting up your business is choosing its formation. Also known as the business structure, a business formation helps determine how your business will function while also offering liability protections.
Types of business formations
Each kind of business structure has its advantages and disadvantages. Understanding every type can help you figure out which structure will benefit your business the most. Here are the most common types of formations:
- Sole proprietorships: As it sounds, a sole proprietorship means that you are the only owner of your business. This type of formation is the simplest as it doesn’t involve any fees or paperwork to set up. With sole proprietorship, only you are responsible for your company’s profits, debts and management.
- Business partnerships: It’s common for businesses to have two or more owners. Splitting the responsibilities can help your business run more smoothly, and each owner will be liable for debts or claims. Business partnerships can face challenges when the partners don’t see eye-to-eye, which is why you should create a partnership agreement before you begin working together.
- Corporation: Unlike the previous two options, a corporation is its own legal entity. This means that it is created solely to conduct your business, separate from any of the owners. In this form, the corporation will have to pay taxes and can face liability claims of its own.
- Limited liability company (LLC): Think of an LLC as a hybrid of a partnership and a corporation. Owners can benefit from receiving profits without taxation of the company, such as in the partnership model, while the corporation model protects them from any personal liabilities.
Choosing what’s best for you
Before you settle on a business model, you should research every type of formation that is available. Make sure to consider all the factors, such as the costs, risks, ease of set up and termination, expansion and taxes.
If you’re still struggling to decide what’s best for your business, consult with an experienced attorney. They can help you through understanding each business structure so you can make an informed decision.