In the United States, several specific classifications are given to different types of businesses based on their ownership. From tiny mom and pop stores to huge conglomerates, just about every businesses you’ve ever dealt with or heard of fits into one of a relative few distinct categories. These classifications serve many functions, including the determination of specific tax and legal implications based on a given type of business. These, of course, play an important role in management’s decisions about their own businesses – whether it be a boardroom of executives or a single person with entrepreneurial aspirations. To further clarify the differences between them, here is a quick guide to the different types of businesses based on ownership.
- Sole proprietorship. When you think of a truly small operation, this is the type of business that typically comes to mind. Often, these businesses are started by an individual with a specific skill, whether it is repair of certain types of products or a service that they perform exceedingly well. From the government’s perspective, the sole proprietorship business type is seen as an extension of the person who owns it. All profits are taxed based on the individual’s income bracket, and there is some extra inherent risk as the business’ owner is personally liable for all of the entity’s losses.
- Partnerships. In order to form this type of business, two or more people must draw up a legal document that establishes their business. In a general partnership, each partner is given equal share of ownership, and is responsible for potentially all of the business’ liabilities. Limited partners, meanwhile, are liable up to their entire personal investment in the business. The responsibilities of each partner and their right to profits vary, as they are determined by the document drawn up during this type of business’ formation.
- Limited Liability Companies. When thinking of this type of business, it’s easiest to envision it as a sort of mini-corporation. Like corporations, the owner of an LLC has limited liability for any losses the business incurs. Because the business is privately owned, there is no double taxation (where both the business’ income and the capital gains from its variable stock price are taxed). Of course, as with any other type of business, there is a trade-off. Limited liability companies are fairly expensive and take a whole lot of effort (read: paperwork) to form.
- Corporations. The vast majority of the world’s biggest businesses are corporations. In this type of business, there are two separate categories. The first is called a C corporation, and is owned by stockholders. As mentioned before, these owners are essentially taxed twice by the Federal Government – once on the business’ income and once on their own capital gains. The second type, called an S corporation, is limited to 75 shareholders – which basically makes it a private business. It’s more commonly used as a classification for smaller businesses. Owners of S corporations aren’t taxed twice, and aren’t personally liable for the business’ losses. But, like other complex business types, they are high in both monetary and temporal costs during formation.