There are basically three types of businesses, each having their own distinct advantages and disadvantages. They are as follows:
- Simple to setup and run
- Income is taxed only once
- UNLIMITED liability - this means that creditors can go after your personal assets for payment of the businesses debts
- Limited growth due to no outside equity funding
- Life of the business may be limited to the life of the owner
- Owned and operated by one person
- Same as sole proprietorship, but with two or more owners (partners)
- Partnership agreement outlines how gains/losses will be divided.
- Same as above, but a limited partner(s) have limited liabilities
CORPORATION - Multiple types of corporations are available, but we will focus on the basics of corporations
- LIMITED liability - unless you sign away your personal assets on a loan, they cannot be sought after by creditors.
- Easy to transfer ownership (stock sales)
- Very regulated
- Corporate income is taxed, and then dividend income is also taxed (the dreaded double taxation)
Different businesses require different business structures. The choice between starting a business as a sole prop or corporation is a tough one – you must carefully consider the pros and cons of each and how they affect your business when making that choice.