INTRODUCTION:
Starting a business can be a complex and challenging process, but with proper planning and execution, it can also be a rewarding and fulfilling experience. There are lot of things involved in it such as developing a business plan, marketing or sales strategy, building team and choosing a right business structure or entity. Deciding which type of business entity to form which is perfect for the business is an important factor. Each business structure comes with its own legal and financial implications.
In this blog we will help you choose the businesses structure or entity for your business.
TYPES OF BUSINESS ENTITY:
There are several types of business entities, each with their own legal and financial characteristics. The most common types of business entities include:
a) Sole Proprietorship.
b) Partnership.
c) Limited Liability Partnership
d) Limited Liability Company
A) SOLE PROPRIETORSHIP
A business owned and run by one individual called a proprietor.
No legal distinction between the owner and the business.
The owner has total responsibility for the profit and debt of the business.
PROS | CONS |
Easy to setup and maintain. | Personal Liability for all debts and legal actions. |
Complete control on Business operations and decision making. | Personal assets like home or car are at risk if business debt not paid. |
Inexpensive to Incorporate. | Difficult to raise capital as can’t issue shares or bonds like company. |
Fewer compliances and regulations. | |
B) PARTNERSHIP
In this structure, 2 or more entity (partners) comes together to operate a business.
The partners share ownership, profits, and management responsibilities.
Partnerships can be formed for any type of business but are mostly used for professional practices such as law firms or medical practices.
PROS | CONS |
Shared financial resources and risks. | Shared financial resources and risks. |
Shared management responsibilities. | Each partner is personally liable for the actions of the other partners and the partnership |
Greater potential for growth. | Difficulty in dissolving the partnership |
More Expertise and Experience with more partners. | The income is passed on to the partners and is taxed individually, which can lead to higher overall taxes for the partnership. |
C) LIMITED LIABILITY PARTNERSHIP
(LLP)
It’s a combination of Partnership and Limited Company.
Owned and managed by two or more individuals (partners).
Pros | Cons |
Partners have limited liability, protecting their personal assets. | Complex to setup and maintain. |
Shared financial resources. | Expensive to setup. |
Shared Risks. | Complex Taxation. |
Access to a wider range of skills and expertise. | |
Learn more about How Punchhole can help you with the Bookkeeping of your Business form the comfort of your office/home.
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