While a corporation is a type of company, not all companies are corporations. Corporations are quite different from sole proprietorships, partnerships and LLCs.
A company is any entity that engages in business and can be a proprietorship, partnership or corporation. One of the first and most important steps in starting a business is deciding how it will be structured. To make an informed choice, you will need to know how the different business structures work, as well as the advantages and drawbacks of each. It is advisable to seek the advice of an attorney when making your decision.
Sole proprietorships and general partnerships are the most common forms of business structure and are the easiest to set up.
A sole proprietorship is a business comprised of one individual and is not considered a formal organization. Legally, this type of business does not exist separately from its owner. The sole proprietor pays taxes on revenue from the business under his or her own name and is solely responsible for the financial operations of the company, including the payment of business debts. If the business is sued, the owner's personal resources will be at risk.
If, as a sole proprietor, you plan to conduct business under your own name, you will not need to file an assumed business name. If you choose another name for your company, you will need to apply for a state-issued assumed name certificate, also known as a DBA (doing business as).
A general partnership is similar in structure to a sole proprietorship except that this structure involves two or more people. Each partner pays his or her own taxes separately, using his own social security or tax ID number, but the company does not exist as a separate entity. Therefore, the financial resources of the business partners could be at risk in the event of a lawsuit.
Unless the individuals in the partnership plan to use their own surnames instead of an assumed business name, the partners will need to file for a DBA.
A corporation is a business entity that legally exists separately from its owner(s). The owners of a corporation are shareholders; their percentage of ownership in the business is represented by their corporate stocks or shares. Shareholders can choose a board of directors to manage business operations, or they can create a shareholders' agreement, which will allow them to manage the business directly.
Corporations are more complex than unincorporated businesses. You will need to file the taxes for the corporation separately from your personal taxes. In most states, you will not be held personally responsible for corporate debts.
Limited Liability Company
A limited liability company is neither a partnership nor a corporation, but it has some characteristics of both. The owners are able to participate in business decisions, as in a partnership, but an LLC offers some protection of the individual assets of its owners. The flexibility of the LLC has made it a popular choice among business owners.
To form a limited liability company, you will need to file a certificate of formation with the Secretary of State office in your state. The form will require you to choose whether your company will be managed by its members or by a manager. Most states will let you complete this form online through the website of the Secretary of State.
A limited partnership is made up of two or more persons, including at least one general partner and one limited partner. Details of this structure may vary from state to state. Business affairs of a limited partnership are conducted according to a partnership agreement created by the partners. The agreement does not need to be filed publicly, but the company does need to file a certificate of formation. If you want to limit the liability of the general partners, you have the option of registering as a limited liability partnership. The Secretary of State can provide these forms.
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