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What are the pros and cons of various business structures?

You have finally reached the point in your life where you decide to move forward with starting your own company. You may feel exhilarated and anxious to get started on creating your new future. Of course, you will need to make numerous decisions before you come close to opening the doors of your new company.

One major decision you will need to make relates to the type of business entity you want to create. In particular, four main types of business structures exist, and each has its pros and cons. Therefore, you may want to explore these structures closely and determine what entity may work for your goals, company ideals and other factors.

Sole proprietorship

The most commonly used type of business structure is a sole proprietorship.

Some pros and cons of this structure include:

  • Pros: You as the company owner and sole proprietor would remain in complete control of the company. You would not have partners or other individuals in managerial positions to challenge your authority or potentially face conflict with. This type of entity is also one of the easier structures to form.
  • Con: As the sole owner and operator of the company, you would retain complete liability for the financial responsibilities of the business. This aspect means that losses fall on your shoulders as well as necessary taxation.

Partnership

If you do not feel that working alone would suit your best interests, you may considering a partnership.

If so, you may also want to keep the following information in mind:

  • Pro: The partnership itself would not have to contend with tax issues. Instead, the business profits and losses are reported by each partner on individual tax returns.
  • Con: While the partnership itself remains protected, forming a partnership means that each person will remain liable for financial responsibilities of the company.

Corporation

A corporation acts as an entity in itself. Rather than you personally handling responsibilities of the business, the corporation does so.

Some pros and cons of this structure include:

  • Pro: With a corporation, you relinquish all personal liability within the company. The corporation faces taxation and legal liability for any actions carried out.
  • Cons: Corporations can also prove expensive to form. As someone just starting out in business, that may be a turn off. Additionally, thorough records would need to be kept when dealing with this type of business structure.

Limited liability company

If you are interested in a business structure that continues to become more popular, you may want to explore the option of a limited liability company. This type of entity is considered a hybrid because it allows for the benefits of both a corporation and a partnership to fall into one structure.

In order to find the best option for you, you will certainly want to assess your personal desires, business aspects and additional information on the types of business structures. When you feel ready to move forward with creating your business, you may want to ensure that you take the correct legal steps for doing so.

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