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The 4 types of business formation

Whether it is a person’s first business or not, starting a business requires one to go through a process of steps. Clearly, the logistics of the business must be planned out, but a business owner must also decide what type of formation will be most beneficial to them. In order to do this, business owners or those considering starting a business should become familiar with the different types of business formations available.

There are four main types of business formation, and depending on the needs of the business and the business owner, some are more advantageous than others. The first is sole proprietorship. This is considered the most simplest business formation, and it is the least expensive type to form as well. For this type, there are no incorporation documents to file or the need to run a business notice in the paper. This type of business has only one owner and there are no protections from lawsuits or creditors claims.

The next type is partnership. With this type, there are no documents to file with your state; however, partners will typically have partnership agreements that are drawn up between partners. This document states how the partnership operates and describes how the profits and losses will be shared. In most states, each partner is held unlimitedly liable for business debts. The third type is a a limited liability company or a LLC. For this, one may be able to file articles of organization or a certificate of formation as a means to form a LLC. The owners of a LLC have limited liability protection. This means that the LLC is responsible for debts versus the individuals. An LLC can be taxed as a partnership or a corporation.

The final type is a corporation. This is considered to be the most formal and the most expensive type of business formation. Filing the Article of Incorporation with the state forms a corporation. The owners of a corporation are provided limited liability protection. A C Corp retains their profits and losses at the corporate level; however, they have double taxation. On the other hand, a S Corp has the profits and losses flow through the business to the owners.

Large or small, new or old, it is important that business owners take the time to ensure one’s business is running properly. This also means determining what kind of liability he or she will face if issues arises. Those dealing with business law maters should take the time to better understand their situation so they can take proper steps to protect themselves.


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