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Types of business entities and how do they differ

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It could be that you want to expand your hobby and convert it into a business. There are different Business entities that can be formed. The type of business that you adopt is likely to affect several factors, some of which might determine your company’s future. It is important to align your goals & objectives to your business type. Hence, it becomes crucial to know the pros & cons of each entity, so as to make the right decision.

Related Post: 8 Success Strategies That Help Small Businesses To Thrive

How a company’s form is likely to affect?

  • Tax
  • Formation cost
  • Legal liability
  • Operational costs

Types of Business entities & their pros & Cons

Types of Business entities

  • Sole proprietorship:

Pros:

  • Owner enjoys all profits
  • Little regulation
  • Total flexibility to run business
  • Simple business license to start operation

Cons:

  • 100% liable to meet all business debts.
  • Proprietor ownership is non-transferable.
  • Distinction not present business & personal income.
  • Equity limited to personal resources of the owner.
  • Business dependently entirely on your decisions.

Also Read: The Formula For Small Business Success

  • Partnership:

In such Business entities, there are two types of partnerships, viz., Limited & General.

Pros:

  • Total profits earned by the company are distributed among each partner.
  • Shared resources offer businesses with more capital.
  • Partnership business, be it informal or formal is expensive to establish.
  • Simple design & flexibility similar to proprietorship.

Cons:

  • Losses & debts are to be borne by each partner.
  • If any partner wants to end the business, then partnership ends.
  • It is difficult to sell off the business. A new partner needs to be found.
  • Corporation:

Pros:

  • Corporation owns all profits & losses generated by the business.
  • The owner enjoys limited liability to losses or debts.
  • Transferable to new owners without much hassle.
  • Business debts not payable by seizing the personal assets of the owner.

Cons:

  • Expensive operations.
  • Setting up this form of business is expensive.
  • Complex paperwork necessary to initiate corporate business.
  • Income gets taxed twice, with some exceptions.

Also Read: How to Build a Strong Business Partnership

  • LLC (Limited Liability Co.)

Pros:

  • LLC profits shred among owners, but without facing double taxation.
  • Company owners experience limited liability for losses or debts.

Cons:

  • Certain state laws limit ownership.
  • Complex & comprehensive agreements.
  • High costs involved to set up an LLC because of filing and legal fees involved.

To know which among Business entities to choose for your business, do consult the industry experts.

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