Types of Business | Blackhat forum

Updated on November 29, 2022 in General
0 on November 29, 2022

In some ways, the decision to start a small business is easy—when compared to the work required to actually do it. The path of an entrepreneur is fraught with twists, turns, and branches. The first fork in the road? Choosing how to structure your small business legally and taxably. Will you choose a specific business entity designation (the legal, structural format of your company) and/or a specific tax status? Small businesses with the same structure will be treated differently by tax authorities depending on the work they do.

What types of businesses are there?

Sole proprietorships, partnerships, limited liability companies, and corporations are the four main types of business entities. There are subtypes of these types, including general and limited partnerships, limited liability partnerships, and S and C corporations. Finally, joint ventures can be formed by temporarily combining the efforts of one or more of the above.

Business entities vs. tax statuses

The above-mentioned entity types may be eligible for different tax treatment by the US Internal Revenue Service (IRS) as well as a company’s state and local tax authorities. The primary distinction between an entity type and a tax status is that business entities can engage in any legal line of business, whereas specific tax statuses are only available to organisations that pursue specific types of work.

Tax status types include:

  • Entities that pass through These businesses are taxed only once, at the owner’s personal income level.
  • Corporations. Corporations (specifically, C corporations) are taxed twice: once on corporate income and again on shareholders’ personal income levels (a practice known as “double taxation”).
  • Nonprofits. Nonprofits are exempt from certain federal and state taxes (primarily income taxes) if they meet certain eligibility requirements as defined by the IRS and state tax authorities.

9 types of businesses 

The way you organise your business depends on whether you are acting alone or with partners, how much personal liability you are willing to accept, and whether you need to issue shares to investors to get your business started.

Sole proprietorship

A sole proprietorship is a type of unincorporated business that is owned and operated by a single person. Its primary advantage is its simplicity. It is the default business entity designation for anyone selling a service or product on their own, and no special filing is required. However, the ease with which a sole proprietorship can be formed is a double-edged sword in that it provides the least amount of protection for the owner of the available entity types.

Sole proprietors are fully liable for the company’s debts and legal liabilities. Other benefits of being a sole proprietor include complete control over the company and a single round of taxation at the owner’s personal income level.

General partnership (GP)

A general partnership is the most common type of partnership—a business owned by two or more people. General partnerships, like sole proprietorships, are subject to pass-through taxation, which means they are taxed only once at the partners’ personal income levels. Similarly, general partners are equal participants in the firm, which means that everyone has an equal say.

General partnerships have some of the same disadvantages as sole proprietorships in that there is no legal distinction between the general partners and the partnership itself, which means that all owners are subject to unlimited liability for the company’s debts and damages. Creditors and lawsuit plaintiffs can seize partners’ personal assets. Furthermore, general partners are personally liable for the actions of all other partners.

Limited partnership (LP)

Like general partnerships, limited partnerships are businesses owned by two or more people. They also benefit from taxation at the source. The main distinction between LPs and GPs is the presence of limited partners, who are only liable for the amount of capital they have invested in the business.

However, each limited partnership must have at least one general partner who bears unlimited liability. A potential disadvantage of limited partnerships is that limited partners generally have little say in the firm’s day-to-day operations—a difficult situation for the liability-conscious partner with lots of ideas about how to manage things.

Limited liability partnership (LLP)

LLPs are also owned by two or more partners and are taxed pass-through. While partners in an LLP are personally liable for their own actions, they are not personally liable for the actions of other partners or the business’s debts and damages. The LLP entity’s main disadvantage is that it is not available to all businesses. They are typically restricted to specific licenced professions, such as law or accounting.

C corporation

The most common type of corporation is a C corporation, also known as a C corps. The main advantage of incorporating your small business as a C corporation is the ease with which you can raise funds. C corporations can be funded by issuing as many shares as you want.

The associated disadvantage is that the C corps is a complex business organisation that necessitates close supervision and a lengthy filing and registration process with your state’s secretary of state, as well as the creation of bylaws and the appointment of a board of directors. Above all, the main disadvantage of forming a C corporation is that you will not be eligible for pass-through taxation. In effect, your company will be taxed twice: once on corporate income and again at the personal levels of owners and employees.

S corporation

S corporations, also known as S corporations, avoid the main disadvantage that C corp owners face: double taxation. S corporations are pass-through entities, which means they are taxed only once, at the owners’ and shareholders’ personal income levels. However, this advantage is offset by fundraising restrictions. S corporations may only issue stock to a maximum of 100 shareholders, and those shareholders must be US citizens or permanent residents.

Limited liability company (LLC)

Many of the characteristics of a partnership are combined with those of a traditional corporate legal entity in LLCs. LLCs exist as separate legal entities from their owners, who can be one or more. This shields owners from personal liability for the firm’s debts and damages.

Another advantage of incorporating your small business as an LLC is its tax flexibility—LLCs can be taxed as corporations (twice) or as pass-through entities, such as sole proprietorships or S corporations. The disadvantage of forming an LLC is that it is far more complicated than forming a sole proprietorship or partnership, such as writing and filing articles of incorporation and appointing a registered agent.

Joint venture

A joint venture is similar to a partnership between two or more separate business entities. Firms agree to pool resources to complete a specific task, usually on a temporary basis, under the terms of the agreement. For example, this can be a specific project or the purchase and joint operation of real estate. The advantage of joint ventures is that they allow participants to benefit from the resources of other participating firms without losing their independence by combining them into one organisation. The main disadvantage is that each participant is personally liable for the joint venture’s costs and losses.

Nonprofit

A nonprofit is a business that the IRS has granted tax-exempt status because it advances a social cause that benefits the public in some way. In that sense, a nonprofit is a tax status rather than a type of entity. The main benefit of forming your small business as a nonprofit is the tax benefits—for example, if your organization qualifies as a 501(c)(3) tax-exempt organisation under the Internal Revenue Code, it will not have to pay federal income taxes.

The main disadvantage of nonprofits is that they are extremely limited in the types of businesses they can pursue and that profits may not be used for anything other than continuing to operate the business.

Determining what business type is right for you

One of the most important decisions you will make on your entrepreneurial journey is determining which business type is best for your small business. Before making a decision, you and any partners should consider the following points:

  • How important is the ability to raise funds for your company’s financial future?
  • Do you want sole control of your company or do you want partners?
  • Are you willing to accept unlimited, personal liability for the business and actions of any partners, or would you prefer some level of protection?
  • Do you have the means to pay two rounds of federal taxation?
  • Is your company’s mission to advance some social good for the public good?
 
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