Business Types: What are the Advantages and Disadvantages?

5
April 2019

Are you trying to decide between running a sole proprietorship or setting up business as a limited liability company? Or maybe it would be easier to form a partnership – perhaps even a corporation? Each type of business structure has its own advantages and disadvantages. You may want to focus on low-cost and flexibility, or you may be more interested in tax benefits and liability protections for owners. Here’s a basic breakdown of business structures, and their primary advantages.

Set-Up Simplicity

A sole proprietorship is the easiest type of business to set up and run, from legal and financial standpoints. At its most basic, you don’t need to file any paperwork – you simply start doing business. If you want to run your sole proprietorship under what’s known as a “fictitious business name,” as opposed to your own name, you’ll need to register your business name with the state (typically you can do this online for a small fee) and open a business bank account (bring your business license with you.)

The most difficult types of businesses to set up and run are corporations and non-profits.

Shared responsibility

With a legal partnership, the business isn’t totally dependent on one person (like a sole proprietorship is). You have two options here: you can form a limited partnership (LP) or a limited liability partnership (LLP). An LP has one partner with unlimited liability (he or she takes on personal responsibility for the business’ debts and legal actions), all other partners have limited liability and – typically, limited control over the company. With an LLP limited liability is granted to every owner, providing each with protection from debts against the partnership.

Protection of personal assets

Forming a corporation provides you with the most protection for your personal assets, the corporation is legally its own entity and totally separated from the assets of its owners and executives. But in return, you have to remain in compliance with record-keeping, operational processes, and reporting regulations. In general, to protect against personal legal responsibility, you’d want to look into forming a Limited Liability Company (LLC). With an LLC, you get some of the benefits of a corporate structure, with less complicated regulatory requirements and potentially a less-significant tax hit.

Taxes

The amount you pay is more dependent on the skills of your financial expert than the type of business you run. In general, though, a sole proprietorship is less complex when it comes to taxes – though you do need to understand how to pay estimated quarterly taxes and self-employment taxes. A good accountant makes life much easier. Corporations and non-profits are the most complex business structures for taxation, and an LLC falls in the middle. Bottomline: don’t choose a business structure for tax benefits, choose a business structure that supports your business vision and capabilities. There’s no clear winner among the types of businesses when it comes to taxation. Talk to a financial expert.

Funding

You’ll find it much easier to raise funds traditionally if you have a corporation or an LLC. You can sell stock, and funding sources like big banks will be more likely to approve loans. Partnerships and sole proprietorships have more limited options, at least until recently. The rise of non-traditional funding sources provides real advantages to small businesses in need of funding, and the basic qualifications for approval are far easier to meet than those of traditional big banks.

One Park Financial works to help owners of small and mid-sized businesses access the working capital that they need. Our process is simple and straightforward, and we’ve helped many small businesses who have been turned down by banks to access funding. Visit oneparkfinancial.com or call 855.218.8819 to discover the options that make sense for you and your business.