Having managed to fund a business does not necessarily make a person a capable entrepreneur. In fact, many people can generate genuine business ideas, yet they face imminent bankruptcy as soon as the company is formed. Therefore, you must be adept at management theories first before you establish a business. And here, we will discuss five mostly used business models/structures.
Limited Liability Company (LLC)
A limited company provides safe insurance for the owners and limited members. They can lose only the money they invest in the venture and are free from any other financial burdens, such as unpaid debts, lawsuits, and vendor disputes. Another advantage is that this form of business is easy to create. In many countries, you can even file an LLC online without any bothersome audits and requirements. These conveniences explain why many startups tend to pick limited liability as their business structure.
However, an LLC is not without drawbacks. First, the company needs to allocate its income to create sensitive reports on revenues and taxes. Second, LLC is not appealing to outside investors because less liability also means less ownership, profits, and no shares. Third, an LLC often has to deal with many types of tax. Usually, you will have to work with a tax agency to solve that problem.
Sole Proprietorship
A sole proprietorship company is an extension of a personal company. It can be owned by an individual or a married couple, and thus, it will be the best business model if you want to establish a family’s company. Besides, in most states, a sole proprietorship is not liable to corporate taxes and annual fillings. Instead, they will be levied as personal taxes.
However, you alone will be responsible for the debts of your company (if there is any). And you alone will be liable if there are lawsuits filed against you by a disgruntled customer/vendor.
General Partnership (GP)
General partnership companies share similarities with the sole proprietorship type, but instead of a married couple, GP allows two or more people to be liable for a business entity. All members of this partnership are expected to share management, debts, profits, and losses.
Business Groups
It is rare for an inexperienced entrepreneur to form a business group directly. This type of business represents several corporations that are often diverse in fields and are tied together to provide either a service or product. They are independent of each other, but they have agreements to support their welfare. Therefore, any business campaigns they make must be for the sake of other companies within the same group.
Corporation
Forming a corporation is not only a matter of budgeting but also a matter of legal strength. A corporation can issue shares and attract shareholders, and thus all of the possible liabilities belong to the company, not to the executives or even the founders. Therefore, many startups tend to choose corporation as their business structure because it can gather investors as many as possible.
However, the main drawback of forming a corporation is that it is notoriously expensive. The revenues are also subject to corporate tax, which can reach as much as 20%. Furthermore, a corporation must allocate a significant budget for the paperwork and reports required by the government.