7 Types of Business Organizations

What kind of business organization should you start? There are seven types of businesses you can create. Which one would suit you the best? 

Starting a business is a big decision. You must consider many things before deciding which type of business to start. The choice depends on your skills, interests, and resources. Choosing the wrong one can mean higher taxes or even bankruptcy. What does it take to choose the right type of business organization? Let Al Bhakta show you.

1. Sole Proprietorships

A sole proprietorship is a business owned by a single individual. Who holds the legal authority to manage the company’s affairs. It is also one of the most expensive to maintain, given the high minimum starting investment. 

A sole proprietorship is usually the only option for a small business owner who does not have the operational experience necessary to run a corporation. 

• Advantages

1. Setting such a business up is easy.
2. These businesses are under less state regulation
3. The company as an entity does not pay income tax.

• Disadvantages

1. The owner is entirely responsible for the success or failure of the business.
2. Sole proprietorships have fewer options for raising capital.  
3. The owner’s personal credit history determines loan eligibility.

2. General Partnerships

A partnership is a business form that permits two or more persons to pool their resources and acquire the assets of another person. Partners share profits and losses in a partnership, and each partner is responsible for all of the partnership’s debts and obligations as if that person were the only partner. Each partner is equally liable for the business’s debts and obligations.

• Advantages

1. Partners can pool their resources, making raising capital easier.
2. A partnership is easy to set up.
3. The tax is divided between the partners as if each partner were the sole owner.
4. The partnership can be dissolved at any time.

Disadvantages

1. Just like general partnerships, sole proprietorships have fewer options for raising capital.
2. The owners are not protected by any liability insurance. 

3. Limited Liability Companies (LLC)

An LLC is a business form that gives its members limited liability, allowing them to protect themselves from personal liability for company debts. The limited liability characteristic of the LLC is achieved through the limited liability company statutes passed in most states.

• Advantages

1. Flexible form of business.
2. Reduces the risk of lawsuits. 
3. Owners avoid double taxation.

• Disadvantages

1. Instead of double taxation, the members of the LLC have to pay self-employment taxes.
2. The company has to follow the laws of the state where the LLC is registered. 

4. Corporations

Corporate finance is concerned with a corporation’s capital structure, including its funding and the actions taken by management to increase the company’s value. Corporate finance also encompasses the tools and analysis used to prioritize and allocate financial resources.

• Advantages

1. Easy transfer of ownership.
2. Business continuity.
3. Better access to capital and occasional tax benefits.

• Disadvantages

1. Double taxation.
2. Excessive tax filings. 
3. Independent management.

5. Nonprofit Organizations

Nonprofit organizations are organizations that are not for profit. An example would be a school or a nonprofit organization that does not charge money for services. If you want to start a charity, this is a good choice for you, says Al Bhakta.

• Advantages

1. Separate entity status. 
2. Perpetual existence. 
3. Limited liability protection. 
4. Tax-exempt status. 

• Disadvantages

1. Cost.
2. Paperwork.
3. Shared Control.

6. Public Benefit Corporations (PBC)

A public benefit corporation is a for-profit company initially known as a post-profit company and has not-for-profit aspects. They are also sometimes called social-purpose corporations or benefit corporations. They are different from for-profit corporations in that they are taxed differently.

• Advantages

1. Social Good as a Priority. 
2. Directors’ Liability.
3. For-Profit Activities. 

• Disadvantages

1. Transparency and Reporting Requirements.
2. Annual Fees to Retain Certified B Corp Status. 
3. Compliance and Governance Obligations.

7. Private Foundations

Private foundations are often formed by individuals who wish to give to a public charity but do not want a formal corporation. It is because they believe that if they form a corporation to give to charity. They will not be able to donate to the charity through the corporation, causing them to lose control over their assets.

• Advantages

1. Tax savings. 
2. A lasting legacy. 
3. Run charitable programs without setting up a separate nonprofit. 

• Disadvantages

1. Excise Tax. 
2. Recordkeeping requirements. 
3. Regulatory requirements.
4. Annual reporting requirements.

Final Words

In conclusion, different types of business organizations have other goals and business structures, different levels of internal risk, and different costs and benefits. For these reasons, a business organization is the best choice for meeting a specific company’s goals and needs. According to Al Bhakta, the type of business you decide to run depends on your personal preferences, objectives, and financial situation.