Which business structure is best for your small business?

There are basically three types of business structures (or forms of ownerships) to start with, and if you are looking to commence a business, you need to study all of them in detail as they are not just different methods to manage a business. Business structure actually plays an important role in many ways. For example, cost of starting and then maintaining a business varies with different structures; then you have this very important objective of minimizing tax payable, another decisive perspective can be the liability factor. You can change the structure in future (e.g. getting into a partnership from operating as a sole proprietor) but it's better to start from the right one, instead of going through the change process later on.

Sole Proprietorship:
The most basic form of small business, where one man starts, manages and owns a business. There's no or minimum start up costs involved, you are the sole possessor of your business and all its assets. However, this sole ownership comes with unlimited liability, which means even your personal assets are at risk in case something goes wrong and a suit is filed against your business. As a sole proprietor, you are responsible to pay income tax on your profits. Apart from the unlimited liability part, sole proprietorship is the most convenient way to start a small business, for example consultancy services, real estate agent, retail store, etc.

Partnership or Joint Venture:
Another very simple form of business structure is known as partnership; in which two or more persons join hands to establish and manage the business. Profit, loss and liabilities are equally divided between all partners (or as per the agreement). Taxation liabilities are same as sole proprietorship, as partners are required to pay taxes on their share of profits, in individual capacity. Just like sole proprietorship, your personal assets are not protected as each partner carries unlimited liability (unless some of them are mentioned as limited partners in the agreement). Partnership can also result in some disputes or personality clashes if all members are fixed at running the business in their own way. Partnership helps two or more people to combine their finances and expertise to form a more competitive business when compared to sole proprietorship.

Limited Liability Company:
Limited Liability Company has characteristics of multiple business structures; it offers tax advantage similar to partnership, while precluding the unlimited liability. Limited Liability Company functions like corporations except that they are not required to offer company shares in stock exchange. Even though the cost of maintenance or establishing a Limited Liability Company is higher than partnerships or sole proprietorships, many smart entrepreneurs still prefer this business structure just because of limited liability clause.

Source:
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