Types of Businesses

There are several different ways to organize your business.

• Sole-Proprietor

• Partnership

• LLC

• Corporation

Let's dive into each one.

But before we do, we forgot the most important question... Is your business for or not for profit. In a traditional for-profit business the owners are entitled to take distributions from the companies profits for themselves. Unlike a traditional for profit business where you as an owner can take distributions from the profits in your business, for a non profit entity you would only be allowed to claim a salary. That salary would need to be taken into account and reported on a form 990. Before giving up on your charitable business idea, make sure that you consult an accountant to review how you can pay yourself a salary and complete your mission. Keep in mind that many non-profits were started with hundreds of hours of human capital before any members were able to be added to the staff and paid a salary.

Now, let's look into the basics of what each type of business ownership is.

A Sole-Proprietorship is a business that is wholly owned by a single individual with no separation from the person and the business entity. For example, let's say that I wanted to start a business cutting grass called Mountain Lawn Care. I could become the sole proprietor and get a fictitious name certificate from my state tax office and officially start operating this business as Jacob DBA(doing business as) Mountain Lawn Care. I would be the business owner and all profits, expenses, and liability of the business would pass through me. The $500 expense to purchase a lawnmower and all gas and consumables would be a business expense, and if I cut 100 yards over the summer at $75each, the $7500 in revenue would be mine to keep(minus taxes on the profits). This business formation strategy is best for small businesses that do not have a lot of risk. In this example if I ran over some rocks and caused damage to the home, homeowner, or pets, I could be held personally liable for the damages.

Another type of business is a partnership. If you and a business partner want to start a venture together, you can create a partnership agreement and split the profits and liability of the business. To make sure that your partnership agreement covers all potential points of conflict within the business, I would recommend sitting with an attorney to draft your agreement. John and I will start Mountain Lawn Care as a partnership. We will both deposit $250 dollars into the business to purchase the equipment and alternate who cuts lawns weekly. Depending on the partnership agreement the liability could be shared or wholly on the person that caused the damage.

The next potential business type is an LLC(Limited Liability Company). This business type separates the business entity from the owner(s). LLC's are formed by 1 or more members that have an ownership stake in the business, and can be managed by either the members or managers. Let's use the same example as above and start Mountain Lawn Care, LLC - this time as a limited liability company. John and I would contact our secretary of state for our articles of origination. We would create a business account for Mountain Lawn Care, LLC and use that account to add John and my personal investments into the business and run all business expense transactions through that account. All the revenue from clients would be deposited into the business account. If damages happened at a client's residence the liability would be on the business.

A Corporation would be the next potential formation for our business. Corporations are separate business entities that are managed by officers of the corporation. Let's say that I am the president and John is the vice-president. We form Mountain Lawn Care Incorporated. The initial company will have 100 shares with a par value of $5, John and I both own 50 shares of the company. The transactions would run the same as in a LLC.

An association is another potential business type. These businesses are typically established by a group of people for a specific purpose. Think of your local home owner's association or a high school reunion planning committee. They are usually established to keep track of dues or fees to plan for that specific purpose (road maintenance, venue rental fees, etc.).

Remember that when establishing a business, there are potential risks to factor in even if establishing an LLC or corporation. Talk with a legal professional to get advice on the best way to protect yourself from liability within the business according to your local, state, and national laws. How you compensate yourself from your business venture is also important. Make sure to keep your money and transactions separate from the business'. If you are unsure whether to take owner draws or a salary, speak with a tax professional for the best advice for you.