Everything in the world is surrounded by the concept of capital and business, there may be different types of business all along the way. There are small businesses and large industrial organizations. Everyone had to struggle through creating a business and there are multiple ways to how a business is planned and sorted out. Every single business had to make up a process as to what they would be functioning with and how they would work along the way. In this article, we would be discussing what a business structure is and how it affects businesses.
Business structure can be defined as the structure of how a business would want to represent itself legally and to the world. It is a representation that allows and restricts certain activities under the organization’s name after its thorough establishment. It is the basic and foremost step in starting up a business as it defines what kinda process and works that need to be set up as a business entity. There are multiple and various factors before legally declaring a business outlet. Let’s discuss the various types and processes that come under the business in this article.
Types of business structure
Business structures depend on the type of business that one is trying to lead. There are mainly 5 types of business structures.
A sole proprietorship is when you have the entire business under your name and have complete control of your business. You are presumed as a sole proprietorship if you do take part in business activities but are not registered as a business of your own. In this type of structure, your liabilities and assets are the same as your business liabilities and assets. One is personally responsible for all losses and debts. It is very hard to raise money while maintaining a sole proprietorship as you can’t sell stocks and banks are very hesitant and questioning to lend money.
This is a great way to open up a small business and enter the business world before proposing a more formal type of business.
While sole proprietorship has just one person handling the business all alone, partnerships as the name suggests have two or more partners that form a business together. Partnerships very commonly showcase two different types of partnerships: limited partnerships and limited liability partnerships.
Limited partnerships generally have a general partner that has unlimited liabilities, meanwhile, there can be other partners with a limited amount of liabilities onto them. Partners with limited liabilities generally tend to have lesser say in the company’s decisions based on their role standing in the company, which is also by default recorded in the agreement documents. Profits are commonly passed through tax returns and the general partner with unlimited liabilities has to also pay taxes in the form of self-employment taxes.
Limited liability partnerships provide each partner with limited liabilities and hence, protect them from the debts of other partners. Every single partner involved in the business is responsible for their actions and no one else has to pay the consequences of anyone’s decision.
Partnerships are a great way of forming businesses as people with similar ideas can form a coalition together to enhance and elevate each of their ideas about the topic and profit the company.
Limited Liability Company (LLC)
LLC allows the owners to take advantage of both corporations’ and partnerships’ business structures. One can easily be saved from various issues as your assets are not linked to your business assets. Members of LLCs are considered self-employed and should be paying self-employment tax capital toward medicare and insurance.
This is a great form of starting small to medium scales businesses as it can prove to be very helpful to understand the framework and how the business is to be handled.
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While the cost to form a corporation may be much higher than that of the other business structures, the amount of security that a corporation provides to the owner’s assets is great. It’s a legal entity that is completely separate from its owners and can make a profit and be taxed upon the profit earned by the corporation itself. Corporations also require way more working processes than that other business structures as it’s a huge formal organization that is handled professionally.
Corporations usually sell their shares or stocks to arrange funds for their new investment in a product or any other service that the organization intends to provide. It is also quite independent as compared to the other business structures as even if the shareholders decide to sell their shares, the organization can pretty much continue to work undisturbed.
The only con that would be against a corporation would be that sometimes it can get taxed twice, that would be once when the corporation makes a profit and the other would be when the shareholders are paid back on their tax returns.
Corporations generally are further divided into more of their types: S corp and B corp.
S corp is a special type of organization built solely to avoid the double taxation that is present in the normal form of corporation. In such organizations, a part of the profit and loss can be directly passed through the owner’s income value without ever being countered to corporate tax returns.
B Corps are generally driven by both a motive and profit. Under normal structures, the shareholders don’t expect the organization to be providing any sort of additional profit for the public, but in B corps it is accountable to do so. Even though the purpose and transparency vary, the taxation process doesn’t.
Cooperative structures generally operate for the benefit of their consumers. Generally, an elected board of directors and officers runs the cooperative with regular members having the power to vote. To become a part of the cooperative, members must own shares of the company but the amount of shares they hold does not bias the power of their vote.
These are the various types of business structures that are generally showcased in the business world and before starting a business should be understood what kind of structure supports the best for your organization. Hope this article was helpful.