If you want to set up a venture the first what you have to decide is the type of your future business entity.

So Similar and So Different Types of Business Entities

What are business entities? A business entity is defined as a body that is formed and managed per the state/nation commercial law in order to be allowed to participate in legal business activities. Different forms of business run through various entities. As a business person, or even without any business mindset or skills, we all know that different people have different characters. Why is this important to business? Owning a business is not as easy as it seems. Initial capital and expertise required to ensure business success may require you to join with other people or friends in order to pool resources together. This being said, the main decision now lays into your hands as an individual. You get to decide if you want to borrow funds only or you want to involve other and venture together on your business idea.

The following are the different types of entities:

Sole proprietorship. This is the most common and simplest type of small and middle-level class business. In most cases, the business is run by an individual with the rare occurrence of hiring casual laborers or getting help from close family members. Most retailers, professionals and service operators tend to operate under this type of business entity.

For example, a doctor may resign and decide to set up shop up-country. Setting up a small clinic requires less capital and legal documents, therefore, it’s easy to start. Having established the clinic, the doctor can now easily manage it since in most cases, he/she will be the one taking care of the patients: Same for a shop. Setting up a retail kiosk doesn’t require a team of experts or employees.

Although sole proprietorship is not a separate entity from its owner, it has its advantages. You get to be your own boss (you don’t need to take those long orders from managers) and you can make decisions easily and fast since you have to make decisions alone without the need of consulting others. Also, in cases of reaping huge profits, you get to enjoy them all by yourself since the government doesn’t highly tax sole proprietors.

Partnership. A partnership type of business entity is where two or more individuals come up together and pool resources and expertise with the sole aim of starting a business together. This business entity is usually favored by lawyers, teachers, doctors, and accountants.

Why should you consider forming a partnership? Partnership fully utilizes resources in order to make profits. This is because there are various experts of different fields under the same roof. Take, for example. When doctors partner up, they offer more services under the same roof such as eye checkups, dental services, gynecologist services, surgeons etc. A single doctor cannot offer all these services at a go and his/her profit making margin only revolves around his single expertise.

For a partnership to be validated, members willing to partner up have to sign a partnership deed which clearly states their position, involvement and responsibilities in the organization (nominal, dormant or active members).

The partnership is classified into general partnership and limited partnership. In the former, the members of the partnership have unlimited liability for the organization’s debts meaning they are personally liable to cover the debt. In the latter, the organization is defined as a separate entity from individuals, therefore, the members are not personally liable for organization debts.

Limited company. Unlike the sole proprietorship, this form of business undergoes thorough scrutiny by the government before it is registered by the registrar of companies. It has similarities with the partnership in that people join together to pool resources. The only outright difference is that new members can join by buying any amount of shares (only in the case of public limited companies). Public limited companies are organizations whose stock is listed on the stock exchange market while private limited companies are firms that do not engage on the stock exchange market.

Cooperatives/economic associations. A cooperative is a business entity which is owned and operated by a group of people for their financial benefit. This entity ensures that the activities of the organization financially benefit its active members. It is made up of three or more people and in cases of a large group, a board of directors is elected to run its operations.

Small Business Corporation. Popularly known as S-Corporation, these types of business entity are created to offer its members special advantages such as tax advantages. So long as the firm meets its annual IRS code requirements, taxes are waived, therefore, cases of double taxation is avoided. The characteristics of this business entity are equally the same as those of a limited company or partnership. Also, the name and scope of firm activities are strictly regulated by its charter.

With enough knowledge on the different types of business, it is now easy for you to start and manage a business without facing technical management hiccups.

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