Types of companies: definition of types of companies
A man is known for the company he organizes.. – Ambrose Bierce
[Types of Businesses] – Owning your own business is an important part of having great economic success in a capitalist society. There are many types of businesses to choose from, so one of the first decisions you will make is what type of business to open. There are several options to explore for your business structure. This article will give you the definition of three of the most popular business types. These types of businesses are: (1) Sole proprietorship, (2) Corporation, and (3) Limited liability company.
(1) Single owner – individual ownership and operation of a company.
A sole proprietorship is not a separate organization and has no formal training requirements. The individual simply begins to do business. Most sole proprietorships are small businesses and their business capital needs are small initially. Typically, the individual provides the funds. To obtain financing, a sole proprietor takes personal financial risk. Business income is the sole owner’s income and is reported on the individual’s income tax return. The owner is the manager of the business. The business can be transferred only if the owner allows it.
(2) Corporation – Any entity formed by statute that has legal person rights together with limited liability for its owner shareholders.
Formal public filing is required to form a corporation. A corporation can use short-term financing or debt and equity financing. Limited liability of shareholders is one of the advantages of business organization. Corporations have the tax consequences of double taxation. Many shareholders may own a corporation, but the board of directors controls the operations. Shareholders have the opportunity to express their views at the annual meeting by electing directors who represent their interests. A corporation can be dissolved voluntarily or involuntarily.
(3) Limited liability company – newer form of business organization in which liability is limited, except in the case of illegal conduct.
An LLC is formed by filing the articles of organization with a centralized state agency. Members of an LLC make capital contributions in the same way that partners make capital contributions. Members of an LLC have limited liability; the most they can lose is their capital contributions. The LLC does not pay taxes; income and losses are passed on to members for reporting on their individual returns. Members of an LLC adopt an operating agreement that specifies voting rights, withdrawal rights, and issues. A member’s LLC interest is personal property and is transferable. Most LLC bylaws state that the LLC is dissolved upon the retirement, death, or expulsion of a member.
Defining these types of businesses is just the beginning of understanding how to fully utilize each structure. Because there are several types of businesses, it is important to know the advantages and disadvantages of each one. The type of business you run will determine a lot about how you reduce liability, protect your assets, and pay your taxes. Defining the type of business for you is important in “Creating your own lane” in business success.