7 Legal Forms of Business Ownership: Which One is Right for You?
If you are thinking of starting a business, you need to choose a legal form of business ownership. This will affect how you pay taxes, how you manage your business, and how you protect yourself from liability. There are seven main types of legal forms of business ownership:
Sole proprietorship
This is the simplest and most common form of business ownership. You are the only owner and operator of your business, and you have full control over all aspects of it. You also have full responsibility for all debts and obligations of your business. You report your business income and expenses on your personal tax return, and you pay self-employment taxes.
Partnership
This is a form of business ownership where two or more people share the ownership and operation of a business. You can have a general partnership, where all partners have equal rights and responsibilities, or a limited partnership, where some partners have limited liability and limited involvement in the business. You need to have a written partnership agreement that outlines how the partners will share profits, losses, decision-making, and management. Each partner reports their share of the business income and expenses on their personal tax return, and pays self-employment taxes.
Corporation
This is a form of business ownership where the business is a separate legal entity from its owners. The owners are called shareholders, and they elect a board of directors to oversee the business. The board hires managers and employees to run the daily operations of the business. The corporation pays taxes on its profits, and distributes dividends to its shareholders. The shareholders pay taxes on their dividends. The corporation has limited liability, which means that the shareholders are not personally liable for the debts and obligations of the business.
S corporation
This is a special type of corporation that elects to be taxed as a pass-through entity. This means that the corporation does not pay taxes on its profits, but passes them through to its shareholders. The shareholders report their share of the business income and expenses on their personal tax return, and pay taxes at their individual tax rate. The S corporation has the same limited liability as a regular corporation, but it has some restrictions on who can be a shareholder, how many shareholders it can have, and what type of stock it can issue.
Limited liability company (LLC)
This is a hybrid form of business ownership that combines the features of a corporation and a partnership. The owners are called members, and they can be individuals, corporations, or other entities. The LLC can choose to be taxed as a pass-through entity or as a corporation. The LLC has limited liability, which means that the members are not personally liable for the debts and obligations of the business.
Cooperative
This is a form of business ownership where the business is owned and operated by its customers, employees, or suppliers. The owners are called members, and they share in the profits and losses of the business. The cooperative is governed by a board of directors elected by the members. The cooperative pays taxes on its profits, and distributes patronage dividends to its members based on their use or contribution to the cooperative. The members pay taxes on their patronage dividends.
Nonprofit organization
This is a form of business ownership where the business is organized for a social, educational, religious, or charitable purpose. The owners are called members or trustees, and they do not receive any profits from the business. The nonprofit organization is exempt from paying federal income taxes, but it may have to pay state and local taxes. The nonprofit organization must follow certain rules and regulations to maintain its tax-exempt status.
Choosing the right legal form of business ownership is an important decision that will affect your future success as an entrepreneur. You should consider factors such as your personal goals, your financial situation, your risk tolerance, your management style, and your industry. You should also consult with a lawyer, an accountant, or a business advisor before making your final choice.
Legal Forms of Business Ownership and Global Demand
Sole Proprietorship
A sole proprietorship is a type of business that is owned and run by one person. It is the simplest and most common form of business ownership in the United States. According to the U.S. Small Business Administration, there were 23.4 million sole proprietorships in 2018, accounting for 73% of all businesses.
However, sole proprietorships have some disadvantages, such as personal liability, limited financing options, and lack of continuity. These factors may limit the growth potential and global competitiveness of sole proprietorships. Moreover, sole proprietorships may face more challenges in the global market due to trade barriers, cultural differences, and legal regulations.
Therefore, the global demand for sole proprietorships may be low compared to other forms of business ownership that offer more advantages and opportunities.
Limited Liability Company (LLC)
A limited liability company (LLC) is a hybrid form of business that combines the features of a corporation and a partnership. It provides limited liability protection to its owners, who are called members. It also allows flexibility in taxation and management. An LLC can have one or more members, who can be individuals or other entities.
LLCs are becoming more popular among entrepreneurs and small businesses in the United States. According to the U.S. Census Bureau, there were 2.4 million LLCs in 2018, an increase of 27% from 2014.
LLCs may also have more advantages in the global market than sole proprietorships. For example, LLCs can attract foreign investors, access foreign markets, and establish foreign subsidiaries more easily than sole proprietorships. LLCs may also benefit from tax treaties and trade agreements that reduce or eliminate double taxation and tariffs. Therefore, the global demand for LLCs may be high compared to sole proprietorships.
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