Types of Business
TYPES OF BUSINESS STRUCTURES
 The Sole Proprietorship
 Partnership
 Limited Liability company
 Corporation
Sole proprietorship
Business classification on the basis of ownership/ Types of Business Ownership
Sole proprietorship:
• A sole proprietorship is an unincorporated business with only one owner who pays
personal income tax on profits earned.
• Sole proprietorships are easy to establish and dismantle due to a lack of
government involvement, making them popular with small business owners and
contractors.
• Most small businesses start as sole proprietorships and end up transitioning to a
limited liability entity or corporation as the company grows.
• One of the main disadvantages of sole proprietorships is that they do not have any
government protection, as they are not registered. This means that all liabilities
extend from the business to the owner.
• Sole proprietors report their income and expenses on their personal tax returns
and pay income and self-employment taxes on their profits
• The business does not need to be registered with the state. Servicemarks and
trademarks can be registered with the Secretary of State’s office if desired. A
Federal Employer’s Identification Number is not required as long as there are no
employees. The business income is taxed at the sole proprietor’s individual tax
rate. All business income and expenses are reported on the individual’s income tax
form 1040 schedule C. Estimated income tax payments are required if estimated
income in excess of $200.
Advantages
Easy to form
No documents to file with state
One level of taxation
Disadvantages
No tax breaks for company benefits
Unlimited personal exposure
Liable for all debts incurred
No perpetuity of business
Partnership
General partnership:
• A general partnership is a business made up of two or more partners, each
obligated for the business's debts, liabilities, and assets.
• Partners assume unlimited liability, potentially subjecting their personal assets to
seizure if the partnership becomes insolvent.
• Partners should create a written partnership agreement or oral.
• General partnerships are less expensive to form compared to a corporation.
• They are pass-through entities where profits or losses are passed directly to
partners, who report them on their personal tax returns.
• As with a sole proprietorship, the general partnership does not need to be
registered with the Secretary of State’s office. The partnership does need a Federal
Employer’s Identification Number even if there are no employees. Each partner
follows the same income and tax reporting procedures as a sole proprietor. The
partnership itself files a Kansas Partnership Return form each year.
Advantages
Relatively easy to create
One level of taxation
Disadvantages
No tax breaks for company benefits
Liable for debts incurred by each partner
No perpetuity of business
Limited Partnership:
• A limited partnership (LP) exists when two or more partners go into business
together, but the limited partners are only liable up to the amount of their
investment.
• An LP is defined as having limited partners and a general partner, which has
unlimited liability.
• LPs are pass-through entities that offer little to no reporting requirements.
• There are three types of partnerships: limited partnership, general partnership,
and limited liability partnership.
• Most U.S. states govern the formation of limited partnerships, requiring
registration with the Secretary of State.
• While the partnership does not need any special registration, a Limited Partnership
Certificate needs to be filed with the Secretary of State’s office. Tax reporting and
payment is carried out the same way as a general partnership.
Advantages
Limited risk to some partners
Relatively easy to create
One level of taxation is possible
Disadvantages
Liable for debts incurred by partners
Taxed as corporations under certain circumstances
No tax breaks for company benefits
No perpetuity of business
Limited liability Partnership:
• Limited liability partnerships (LLPs) allow for a partnership structure where each
partner’s liabilities are limited to the amount they put into the business.
• Having business partners means spreading the risk, leveraging individual skills and
expertise, and establishing a division of labor.
• Limited liability means that if the partnership fails, then creditors cannot go after a
partner’s personal assets or income.
• LLPs are common in professional businesses like law firms, accounting firms,
medical practices, and wealth managers.
Advantages:
Same as partnerships in addition to limited personal liability
Disadvantages :
Same as other partnerships
Advantages :
Owners liability limited to amount invested
Company can pay for benefits
Perpetuity of business
Ability to buy and sell assets
S-corporation has one tax level
Cash can be raised through sale of stock
One or many owners
Business is own legal entity
Disadvantages :
More difficult to start than proprietorships and partnerships
Two tax levels for C-corporations
Limited Liability company
A limited liability company (LLC) is a business structure in the
U.S. that protects its owners from personal responsibility for its
debts or liabilities. Limited liability companies are hybrid entities
that combine the characteristics of a corporation with those of a
partnership or sole proprietorship.
Advantages
 LLCs do not require annual meetings and require few ongoing
formalities.
 Owners are protected from personal liability for company
debts and obligations.
 LLCs enjoy partnership-style, pass-through taxation, which is
favorable to many small businesses.
Disadvantages
 LLCs do not have a reliable body of legal precedent to guide
owners and managers, although LLC law is becoming more
reliable as time passes.
 An LLC is not an appropriate vehicle for businesses seeking to
become public eventually, or to raise money in the capital
markets.
 LLCs are more expensive to set up than partnerships.
 LLCs usually requires annual fees and periodic filings with the
state.
 Some states do not allow the organization of LLCs for certain
professional vocations.
Corporations
•
A corporation is legally a separate and distinct entity from its owners.
Corporations possess many of the same legal rights and responsibilities as
individuals.
•
An important element of a corporation is limited liability, which means that its
shareholders are not personally responsible for the company's debts.
•
A corporation may be created by an individual or a group of people with a shared
goal. That does not always involve making a profit.
Advantages
 Owners are protected from personal liability for company debts and
obligations.
 Corporations have a reliable body of legal precedent to guide owners and
managers.
 Corporations are the best vehicle for eventual public companies.
 Corporations can more easily raise capital through the sale of securities.
 Corporations can easily transfer ownership through the transfer of
securities.
 Corporations can have an unlimited life.
 Corporations can create tax benefits under certain circumstances, but
note that corporations may be subject to "double taxation" on profits.
Disadvantages
 Corporations require annual meetings and require owners
and directors to observe certain formalities.
 Corporations are more expensive to set up than partnerships
and sole proprietorships.
 Corporations require annual fees and periodic filings with the
state