We all hear about different kinds of businesses, but do we know the difference between a ‘mom and pop store’ and a corporation? Before we try to figure out the differences between everything, how about we start with what a business is. In simple terms, it is anything that involves selling a good or service.
McDonald’s selling burgers is a corporation, and your local landscaper can be an LLC or a Sole Proprietorship. By the end of this article, we want you to know and be able to explain the differences between the three main types of businesses.
What Is a Sole Proprietorship?
A sole proprietorship is when a single person or a married couple start up a business. These kinds of businesses are commonly referred to as ‘mom and pop shops’. They are also the most common business structures people encounter. Sole proprietorships benefit from having the largest degree of legal and fiscal flexibility.
Although owners have a significant degree of autonomy, the major disadvantage here is that there is a large amount of personal responsibility. With a corporation or LLC, the owner is not responsible for any losses. In a sole proprietorship, owners are liable for any debts or legal issues related to the business’ operation.
Since it can be assumed that the company is the primary income of the owner, owners can apply for S corp status. An S corp allows for greater shielding from taxes if the business is the owner’s primary income. Also, with a sole proprietorship, there is a maximum number of employees that can work for these companies. According to the Small Business Administration, in the U.S., this number is capped at 500. Companies like Incfile can give you loads more information on setting up an S corp.
What Is a Corporation?
A corporation is when a group of people comes together to form a business that is legally considered its own right. A good metaphor for this type of business structure is an anthill. There can be thousands of workers, guards, and a queen, but people don’t refer to the ant colony as a bunch of individuals, it is referred to like one thing.
This type of business structure enjoys the most personal freedom, in the sense that the owners are not held personally liable for any debt. The advantage of forming a corporation is the benefit of not being personally responsible for any failures and losses of the company, but there are two major disadvantages.
The first disadvantage is a large amount of startup capital required to start and register a corporation. The other drawback is how detailed the records of the company need to be.
What Is a Limited Liability Corporation (LLC)?
If a sole proprietorship and a corporation structure were to have a kid, that kid would be an LLC. This structure offers the best of both worlds. For starters, ownership is by a group rather than a married couple, but legally, it is one person. LLCs need to have clearly defined roles for the management structure and operations of the company.
In the USA, LLCs must file with the secretary of state in Washington D.C. as a corporation would. Profits and losses are not tied to a certain number of people. They can be freely moved without the business or individuals being taxed, a benefit of sole proprietorship’s structure. The advantage is that rather than the owner be held personally liable, it is instead tied to the business. This way, individuals are not responsible for any issues that come from day to day operations.
Three Business Types
So there you have it, you now know about three business types. You can explain the differences between a sole proprietorship, a company, and an LLC. If you are looking to start up your own business, maybe one of these three types is the perfect option for you.