Whether you’re just starting your business or you’ve been running it for years, it’s important to understand your business formation. For many start-ups, this is a crucial and often overlooked step for making a strong business. Yet, even long-term businesses should have an understanding of where their current formation stands and how they can use it or change it going forward.
If you’re looking to understand what a business formation is then look no further. There are many aspects of business formations that you should be well aware of. Here’s what you should know:
4 kinds of business formations
Business formation is all about founder liability, taxes and many other critical details. There are four kinds of business formations:
- Sole proprietorship: a single-owner business, which is often simple and inexpensive. A sole proprietorship is excluded from legal and financial protections, meaning it may be vulnerable to lawsuits and creditor claims.
- Partnership: business ownership between two or more parties that determine how a business is run. A partnership allows a business to share responsibilities and burdens, however, this can also lead to clashing opinions and conflict. Much like a sole proprietorship, a partnership also lacks many legal protections.
- Limited liability company (LLC): a business formation that protects its owners from debt and liability responsibilities. An LLC has many shared aspects of a partnership and corporation. As such, an LLC has a flexible management and doesn’t have to follow corporate formalities.
- Corporation: an expensive organization that acts as a single entity. A corporation acts much like an LLC, yet, is unrelated to its owner and allows shareholders to profit from their participation without facing damages by the company’s debts.
As stated above, a business can change its formation and may need to as a business grows. It’s important to remember that each business formation has its advantages and disadvantages. For example, a business formation such as a sole proprietorship allows people to be their own boss, however, their success or failure is also their responsibility.
If you’re unsure how to develop your business, then you may need to reach out for legal help to better understand your options.