If you are one of those who is planning to start a business or want to become an entrepreneur, then here are the 7 types of businesses which are most common types of businesses in today’s world which you must know. Each business type involves its own business strategies that helps the business owner to start a business by considering various business factors to establish from scratch.
It is not a big deal that you are starting a business. What is the big deal is the which type of business that you are going to start as it is the one that decides your future business, how much taxes you are going to pay, how much money you have to invest, how much paperwork you must file, how much time that you have to spend, what will be your personal liability, and the ability that defines how much money you are going to raise in order to take your business to the next level.
Always do remember that, it takes a lot of research, strategic planning, and assessment to choose the right type of business that makes it to stand higher among the rest of businesses. Well, this video is focused on guiding you on how you can choose a business from the crowd of different types of businesses.
- 1 7 Types of Businesses You Must Know
- 2 How to Choose Which Type of Business to Start?
- 3 Conclusion
7 Types of Businesses You Must Know
Although there are many types of businesses all around the world which many people love to define, here are the most common types of businesses that you can start today. These types are made into the list of business types upon consideration of various factors such as, ownership rules, liability, taxes involved, return filing, and so on, which depends upon state to state or country to country.
7 types of businesses that every entrepreneur must know:
1. Sole Proprietorship
3. Limited Liability Company (LLC)
4. Corporation – C Corp
5. Corporation – S Corp
6. Corporation – B Corp
7. Corporation – Nonprofit
Types of Businesses:
A Sole proprietorship is the most common type of business that many people start who wish to be entrepreneurs. It is one of the simplest and most preferred type of business that a single person or a married couple start, wherein one person takes all the company’s profit and debts.
If you are just started and want to work alone for your passion, then this is the business that you should choose to start. This is a type of business wherein the income and expenses are included on your personal income tax record. In the Sole Proprietorship business, you are the only one who will be having the complete ownership of the business and all business decisions can be wisely and individually taken by you.
All the profits and losses that you make from this business are recorded on the Schedule C Tax Form and the amount will be transferred to your personal tax return. Whatever the losses that is incurred from this business can offset income that you have earned from other businesses.
The biggest disadvantage of the sole proprietorship business is that, you are the only one person who will be held liable, personally for all of your company’s liabilities. What this means? This means that, all of your personal assets could be placed at high risk in order to satisfy your business debt or settle down any legal claim that has been filed against you.
If you know starting a business could be a risky decision, then Partnership type of business is the right one for you. In Partnership type of business, the business will be managed by multiple people, will be held accountable and operate all of its operations. You have a friend with the same passion as yours or have a family member who has the same thoughts of yours, then the partnership business is the one for you.
Do remember that, the Partnership business comes in two forms and they are mentioned as below:
- General Partnership
- Limited Partnership
In the General Partnership, the general partners assume responsibility of all the company’s debt. Where as in Limited Partnership, includes both the general as well as limited partners. This means, the limited partners are nothing but the investors who will be having no control over the company’s operations and won’t be held for any liabilities. And, the general partners own a company completely with its operations management and will assume all the liabilities.
The disadvantage of having limited partnership is that you will be intended to have multiple passive investors, wherein the business administration becomes complex and requires filings. This is more dangerous especially when you have just started as a new business owner.
So what, partnership is not the best choice for you? Well, it isn’t the case so. You can always chose to go for general partnership type of business, especially when you have two or more partners who are willing to actively involved in the growth of your business. This is why a general partnership business have a great advantage over the gaining the tax benefits.
The good part of partnership type of business is that, it doesn’t pay tax on its income but instead passes or splits up the profits and losses on to each one of the partners. Since the partnership businesses requires extensive accounting and legal services, they are usually expensive to start initially.
Limited Liability Company (LLC):
As the name suggests itself, the Limited Liability Company is the one that allows you to protect personal assets of anyone who is part of the business. This means, the company with limited liability allows owners, partners, and shareholders to limit their personal liability in order to protect their personal assets from greater risks.
In short, a limited liability company is not an incorporated company, but allows the owners, partners, and investors to enjoy the limited liability of corporation. The good part of limited liability company (LLC) is that, it can be taxed as a sole proprietorship, partnership or even as a corporation.
There are plenty of benefits that a limited liability company can enjoy. Some of the benefits are listed below:
- There is no limitations on the number of shareholders that it can have to manage its business
- Any owner or any member can have a full participatory role in managing the operations of the business
- Plenty of flexibility in the distribution of its profits
- No matter whatever the profits and losses are, there is no need of equal distribution against the money that the investor puts in
However, the most common disadvantage of a limited liability company is that, they are considered to be of relatively new business structure and the taxes can vary by state to state.
Corporation – C Corp:
If you are thinking of a business that is of something really big, then the Corporation C Corp type of business is the one for you. This is for the fact that, the corporations offer the strongest amount of personal liability protection. But do remember that, starting a corporation also costs a lot and the maintenance costs can be really higher, which makes them difficult to build and takes years to build.
When you start a corporation business, it becomes very difficult to manage as the company’s so called corporations also require highly intensive record-keeping, extensive reporting, and very high level of intensive, rigorous operational processes.
The best part of corporations are that they are completely independent of shareholders. The corporations always pay income tax on profits and in some cases can be taxed twice.
However, the corporations have extreme advantage when they are raising a capital because they can raise money by selling stock. Stocks are also considered to be the best options for attracting employees.
Corporation – S Corp:
When it comes to companies that are considered to be S Corporation companies have the liability protection of corporations along with ‘n’ number of several tax benefits. In S Corporation type of businesses the owners can be able to use the cash method accounting when they don’t have any inventory.
The disadvantage of having a S Corporation business is that it is hard to attract more capital, since they can have up to shareholders. The S corporations must file articles of incorporation such as corporations and hold directors including shareholder meetings.
In S Corporation businesses, the shareholders must be allowed to vote on major decisions. Another drawback is that, the S Corporations can only issue common stock which could highly impact the corporation’s ability to raise capital.
Corporation – B Corp:
A B Corporation is a for-profit corporation which is driven by mission and profit. A B Corporation can also be called as a Benefit Corporation.
The B Corporations are also taxed in the same way as that of C Corporations, but the only difference is that, the B Corporations are more focused on purpose, accountability, and transparency.
Corporation – Nonprofit:
The Nonprofit Corporations are the one which are built to benefit a cause. If you are one of those who love to do social working and help the humanity by offering services to solve a cause, then this type of business is the one for you. A Nonprofit Corporation aims to do philanthropic work.
Since the nonprofit corporations are setup to benefit the public, they can receive great tax exemptions and can pay taxes on profits. Similar to the C Corporations, the Nonprofit Corporations also follow the same set of organizational rules, but will have special and specific rules regarding making profits.
How to Choose Which Type of Business to Start?
Well, now you know what are the types of businesses that you can start, let us also understand how to choose a business type that can make your dream of entrepreneurship come true. Here below we have covered the most important factors which you need to consider before you wish to start a business:
6. Capital Investment
Factors to Consider Before You Choose a Type of Business:
Let us go through all factors that matters the most while choosing a business type to accomplish your passion.
When you though of becoming an entrepreneur, the first thing you must think of is the flexibility in the type of business you own. Your goal should be towards choosing a type of business that allows you to have maximum flexibility in terms of ownership structure, especially when you want to have full control on your business.
It doesn’t matter whether you are owning the business with your family members or a couple of owners, you need to have flexibility based on the number of owners. Actually, you must consider the goals, needs, concerns, and financial situations of each owner in your business.
Liability is the one that matters a lot when you own a business or a company. When you choose a business, you should also equally think of the extent to which you need to be protected from liability.
You can either choose to afford the risk all by yourself personally or offload the risk to others. To do so, you must examine the potential liability of your organization in detail before taking any decision. But when you are not sure of the liability then starting a partnership or sole proprietorship business is not the best option for you.
Another factor that matters when you are choosing to pick a type of business is that the complexity of the business. In order to start a business of your choice, first establish the level of complexity that you want to take on.
If you want to have a business that offers the most simplest type of business, then sole proprietorship can be the best type of business which can be the simplest type of business. However, if you go for the other types of businesses that are listed above, then they can become highly complex type of businesses, especially when you have to fulfil the requirements of state and federal reporting.
When you think of starting a business, you might have never thought about the taxes or may not have any idea about the taxes in businesses. Well, this is a very important factor that you must consider to choose a business type.
This is for the simple fact that having an organization or running a business with an organization can be accounted for tax implications which varies from state to state. This means, you need to pay taxes to the state government where your company is residing. You must think of opportunities to minimize those taxes and make the organization worth to setup.
Do remember that, the corporations will get more tax benefits or options to minimize the tax than that you see in partnerships or sole proprietorship businesses. Even though there is a problem of double taxation on corporations, you can avoid that by setting up a S Corporation type of business.
Every business owner wants to have a control over their business operations. This is for the fact that, they don’t want their company or business to see losses. Yes, that’s 100% true, meaning you have to decide the amount of control that you want to have on your business before you thing of starting one.
If you are looking for a business where in you can have full control on the business, then the limited liability company (LLC) or a sole proprietorship businesses are the one for you. Here a single person can control a corporation, and as the business starts growing, the company can be directed to become a board-directed entity.
You are planning for a business that is designed to be a big corporation company, then you must think of considering a capital investment as one of the factors to choose a type of business. A corporation company will allow you to plan to seek outside funding or investment to your business from so called investors, who will be ready to pump in real money if they like your business with a share of some percent of equity.
Also, the corporations allows you to see some additional outside funding by selling stock to either public or investors. This type of outside funding you can’t see in sole proprietorship as they have to fund the company from their personal bank accounts or partners if they have any.
The fun fact is that everyone wants to start a business, but hardly few knows which are the types of businesses that are available to start? In this article, we tried to address your query if you are looking for which type of business to start.
Even though there are plenty of business types that you can start, you must consider the factors that matter in order to start a business such as, control, liability, capital investment, flexibility, taxes, and so on. These factors helps you decide the type of business that you could setup and accomplish the results that you were looking for.
“Hey, I am Sachin Ramdurg, the founder of VDiversify.com.
I am an Engineer and Passionate Blogger with a mindset of Entrepreneurship. I have been experienced in Blogging for more than 5+ years and following as a youtuber along with blogging, online business ideas, affiliate marketing, and make money online ideas since 2012.