There are many facets to being an entrepreneur. Determining the business structure that best suits the needs of the business owner is a vital step. The type of business structure that a person employs may help to create a solid company, or may lead towards failure. To determine what type of business structure is needed, the potential entrepreneur must look at types of business structures available and decide on which one best suits the company.
There are three basic types of businesses; sole proprietorship, partnership, and a corporation. Each offers its own advantages and disadvantages as seen in the table below.
The first basic business structure is the sole proprietorship. "A sole proprietorship is a business owned by one person." (Parrino, Kidwell, & Bates, 2012, p. 6) This type of business structure is the largest type in the United ...view middle of the document...
The second basic business structure is a partnership. In this category, there are limited partnerships and general partnerships.
A "partnership consists of two or more owners who have joined together legally to manage a business." (Parrino, Kidwell, & Bates, 2012, p. 7). In a general partnership, the same advantages and disadvantages as a sole partnership apply. All partners have unlimited liability for the firm and for each of the partnership's debts and actions. This unlimited liability however can be avoided by using a limited partnership. In a limited partnership, each partner is only responsible up to the amount of capital that he or she has contributed to the partnership.
The last business structure is a corporation. "A corporation is a legal entity authorized under a state charter." (Parrino, Kidwell, & Bates, 2012, p. 7) One of the major advantages a corporation offers is limited liability. In a Subchapter S corporation, stockholders are able to receive the benefits of a corporation while being taxes like a partner in a partnership. Corporations are also able to be classified as public or private allowing corporation to raise capital through public markets. Some disadvantages are higher taxation and startup costs.
Although these are the three basic business structures, there are some hybrid forms of business such as the limited liability partnership. This type of business structure offers advantages of a corporation with limited liability and a lower taxation rate.
Determining the business structure that best fits the needs of a business is important. Multiple factors including size, wealth, management, liability, and even physical location may affect what type of business structure is best suited. If the correct business structure is not chosen, the people involved may lose everything, including personal assets in some cases. However, choosing the correct business structure helps to ensure success.