One of the first actions that aspiring entrepreneurs like yourself need to do when setting up a business is deciding which type of structure is the right choice for the organization. This initial step can help determine how a business will be managed legally and financially.
In this blog, we will discuss three common types of business entities:
Sole proprietorship
Recognized as the most common form of business entity for small businesses, sole proprietorship involves a single owner. Under this business model, the owner is fully responsible for their daily operations. They also manage their profits, debts and taxes on their own or with the help of an accountant.
Since they can operate under their own name, they do not need to register as a sole proprietor with their state. Four common examples of sole proprietorship businesses are photography studios, bakeries, grocery stores and catering services.
Partnership
A business partnership is a formal arrangement between two or more people. When someone builds a business with another party, they agree to operate the business as partners and share the profits equally.
The state of Massachusetts follows the Uniform Partnership Act. This act exists as a general guidance for partnership agreements, defining their duties with conciseness and how the business’ liabilities must be managed amongst the partners.
Limited liability company (LLC)
Also known as a hybrid entity, LLC carries the characteristics of both a corporation and a partnership. This business model is not subject to taxes; rather, the business’ profits pass through the owners, who must then pay the taxes on their personal returns.
When entrepreneurs choose this type of structure for their business, they are able to carry a liability protection similar to a corporation, while having the freedom to choose how their business will be taxed.
Your business’ future is in your hands
By taking your time to understand the diverse types of business formations, you can make informed decisions that can guide your business in the right direction.