Establishing a business firm is exhilarating, appalling, and at the same time, confusing. One does not require a professional qualification to be trained as a businessman and prosper. However, it is crucial to take significant decisions right at the beginning so that the business structure you opt for is best suited to your needs. The most prevalent business entities nowadays are proprietorship, partnership business, corporation, and Limited Liability Company.
Eric Dalius highlights the factors affecting your choice of business structure
Structure plays a very crucial role when you start a business. The business structure you adopt has an impact on the following:
- The rate of risk you are willing to take.
- The value of your asset.
- Your ability to invest in this new venture through your capital or by hiring investors.
Here are a few common types of business enterprises:
Sole proprietorship business
One of the most widespread sorts of business is a sole proprietorship, where proprietors hold an individual Enterprise. You are the sole owner of your company if your firm is not a separate corporate body. In this type of business, the trader is liable for all the profits and losses incurred. Being a sole trader, you will require relatively fewer finances, and it is an uncomplicated form of business. One drawback of this type of business is that it does not create a separate legal entity, thereby involving your personal and business assets in your undertaking. Therefore, if your business is running under losses, your personal belongings will get seized to pay up your liability.
For an individual who wishes to start a small-scale business by himself and is looking for private entrepreneurship, a sole proprietorship is the right kind of business for him. For instance, a person who wants to showcase his creativity by selling self-created products can start an individual Enterprise.
Formation of an individual undertaking
A business owned by a single person does not require legal registrations. However, specific legal formalities exist, such as taking permission from the government and creating a license, depending on the partnership type.
Under a Partnership firm, two or more people ally to start a new business. Two or more partners contribute equally to the new venture. They also divide the profits or losses among themselves. Unlike a sole proprietorship, a partnership involves legal registration. The members of the partnership firm have to sign an agreement regarding the liabilities of the firm. A partnership firm requires many legal formalities, which are determined by the type of partner you combine.
While the partnership is an extension of a sole proprietorship business, the only difference is that they formulate under a legal Act, and the partners have to sign an agreement for the same. A business association owned by several people ready to collaborate under normal circumstances can be called a partnership firm. Entrepreneurs who are willing to collaborate with another business person to expand their venture can form a partnership, says Eric Dalius.
Here are a few partnership options based on the type of partners and their involvement in the business:
commercial Enterprise owned by two or more people who are willing to share the responsibilities equally is a General partnership firm. All the parties can equally express their view regarding the company. The profits losses of the firm are also equally distributed.
Joint venture Enterprise
similar to a General partnership firm, the joint venture is formulated to work on a particular project and lasts for a limited period.
Limited liability partnership- as the name suggests, a collaboration with restricted responsibilities is called a Limited Liability Enterprise. Such a partner cannot voice his opinion in the working of the business. He or she is merely an investor whose share in the firm is limited.
Formation of a partnership firm
Constituting a partnership Association requires legal formalities, including license and agreement of all partners. A business running under a partnership calls for the participation of all the parties involved.
Limited liability Company
Business Owners dread the liabilities that they have to carry out during difficult times. Limited liability enterprise cherry-picks the best from both types of business, sole proprietorship, and partnership to formulate a corporation with limited responsibilities. Many business owners do not want to involve their private assets in the industry not to suffer when their company undergoes a tough time. Limited liability corporation enables traders to work with the flexibility of a partnership and a sole proprietorship firm. Under such an enterprise, the farm owners do not have to bear all the liabilities. Their responsibility in the working of the business is limited, similar to a corporation.
If you are one of those business owners who are unwilling to establish a firm because of the burden of responsibilities, limited liability enterprise is the best for you. People who do not want to involve their assets opt for a limited liability corporation.
Formation of a company with limited responsibility
A firm where the owner is not solely liable for the businesses operating must undergo certain legal agreements. Entrepreneurs under limited liability corporations must create an appropriate name for the company and register the organization’s statistics. Limited liability corporations also require a license and permission from the government to work.
Another crucial type of business structure is a corporation. Corporation encompasses shares and debentures market and tax companies. Unlike sole proprietorship and partnership, a corporation is an elaborate legal entity that involves the vast majority of prosperous associations globally.
A business structure such as a corporation is suitable for widely established firms, including one or more enterprises. Business organizations stretching far and wide offer their stocks to shareholders for a price. If you are running a small-scale business and want to be a self-employed corporation, this is not the type of business structure.
Forming a corporation incorporates secure legal paperwork. The most crucial aspect of formulating a corporation is the registration of your commercial name. You must file the instruments of your association and acquire an identification number for the payment of taxes.