Are you contemplating starting your own business? Then, you should be aware of the different types of business organizations and realise which one suits you the best.
Each business type is best for specific purpose, product, idea or situation. Types of business also rely upon taxes, liabilities and our ability to manage profit and loss of the business.As small businesses change overtime it is important for you to understand what type of business organization you choose today will help your business in the future.
Before we take you through the different types of business organizations let us put together the major categories of businesses.
General Types of Businesses
1. Service Business – A type of business where the product is not tangible or doesn’t have a physical form. Such firms offer professional skills, expertise, advice, knowledge and the like.
Example: Schools, law firms, software development companies, salons etc.
2. Manufacturing Business –Types of business that combines raw materials, labour, skill and factory to develop a new product that is tangible. Manufacturing businesses buys products and services and use them to build something new.
Example: Shoes, clothes, processed foods, furniture, electronics and so many more.
3. Merchandising Business – Businesses that buy products at wholesale and sell them at retail price. They make profit by selling the products at higher price without changing any form.
Example: Franchise, show rooms, groceries, distributors and more.
Then there is a Hybrid business where a particular company may join 2 business types together to create one.
Example: Restaurants that make food (manufacturing) also sell coke (merchandising).
You should also know that business types are set through the state business division or corporation offices. Many states have different limitations and regulations on who can form each business type and which business type can be established.
All states allow partnerships, corporations and LLCs.
Different Types of Business Organizations
Here are some of the different types of business organizations that you can consider:
1. Sole Proprietorship
A sole proprietorship business is run and owned by a single individual. The business is part of him and not a separate entity. Freelancers, consultants, independent contractors are termed as sole proprietors. Their profit and loss is included in their personal tax returns. It is an easy form of business to establish and dissolve. Sole proprietorship doesn’t have to be registered with the government.
A partnership organization consists of two or more business owners, who share both the profits and losses of the business (depending upon the share ration). There are different types of partnership inside a firm. You have general or active partners who not only invest in the business but also bear the responsibilities in running the business, including liabilities. Then there are limited or dormant partners who though invest in the firm do not take part in the operations of the business.
Partnership can be formed based on need, type of business and state regulations. Some of the possibilities include general partnership, limited partnership, and limited liability partnership.
It is a separate entity or legal personality that is different from its owner and is formed under the laws governed by the state in which it is established. There are two basic types of corporations
- Stock Corporations
- Non Stock Corporations
Stock corporations have shareholders, in which ownership is represented by the number of stocks.Here the owners enjoy limited liability and have limited involvement in company’s operations. The company board of directors control the activities and operations of the corporation. Most corporations are closely held with limited number of shareholders.
Corporations can also be non-profit business organizations.
There is also S Corp, a substructure which although enjoys the benefits of limited liability but is taxed as partnership with income and loss flowing through each shareholders. Only if you have a corporation registered and set, you are capable of electing a S Corp status.
4. Limited Liability Companies
LLCs are not corporations as it is not incorporated according to the company laws but it includes the liability protection of a corporation. You can build a single tax payable LLC like sole proprietorship or multiple tax payers LLC like partnership. One can also set up several LLCs known as Series LLC that has a parent LLC and its sub LLCs. The Series LLC is available only with few states.