What Type of Small Business Should You Own?
A Home Business Article Contributed by Sharon Hill
Should Your Small Business Be a Corporation?
There are many things to look at when making the decision whether you should incorporate your small business. Let's look first at the alternatives.
Three Types of Small Business
There are three basic types of small businesses - sole proprietorship, partnership and corporation. While there are several types of corporations, we'll first look at an overview of these three basics.
Sole proprietorship - you own the company yourself. Solely, as the name implies. If the company gets into financial hot water your personal assets are at risk. There is, however, a lot to be said for going it alone - making your own decisions, not having to "play well with others."
Partnerships - Well, we've all heard partnership horror stories. Folks that don't get along, steal from each other, can't come to an agreement. It's all true. But then, again, perhaps it's nice to share some of the financial risk. Keep in mind, of course, that you're also sharing the wealth. You can, if you wish sole decision making responsibility but need an influx of cash, offer a limited partnership to others.
What this means is that your small business limited partner would provide cash to your small business, take part in the profits, would take no part in business decisions, and would not be personally responsible for any debts incurred by the business. So in this situation you borrow the wealth and share the wealth - but you remain your own boss.
Corporations - there are several types of corporations. In general what this boils down to is you are separating your personal assets from that of your company. In other words, you are protecting your personal wealth from being used to pay the debts of your company should you experience small business failure. To incorporate is not that complicated - you file with your state's designated office - often the Secretary of State. You fill out an Article of Incorporation and pay state fees and prepaid taxes.
An S Corporation differs from your standard C Corporation in that the company liabilities are the responsibility of the shareholders. In an S Corporation your personal assets are not protected from seizure should your S Corporation fail.
Making Your Small Business a Limited Liability
A limited liability (or LLC) is a hybrid of two small (or large) business types. A cross between a partnership and a corporation, a Limited Liability Corporation combines what is called a pass-through process of a partnership with the limited liability aspect of a corporation. What does all this mean?
Well, pass through refers to the fact that each partner is separately as well as jointly responsible for the debts and taxes of the firm; each is also acting as a representative of the firm, making the other partners also responsible for their business actions on behalf of your small business, whether positive or negative, legal or not.
Making a determination of what form is best for your small business is complicated. It can affect not only your emotional well being but your wallet as well. For this decision you will want to seek the assistance of a professional CPA or attorney.
