Want to Start Your Own Business? Choose Your Business Type.

Knowing the different types of business entities and how to start one is “gold” information for aspiring entrepreneurs.  If you’ve thought about starting your own business or capitalizing on your idea, know that the legal type of business you create, by no exageration, can be the “break it or make it” for you in the short or long term. From my own experience starting Motilek Wood Bowties, business courses, and other entrepreneurial experience, I’ll share some of what I’ve learned about the perks and setbacks of each business entity.


Note! Please know before you read on that the legal process of creating your own business really may be much easier than you anticipate (particularly for the first two models we’ll talk about). This is largely in part to how friendly American policies are concerning entrepreneurs. I haven’t seen it first hand, but learned from business courses that legally starting a business in Europe is very difficult. Compare this too with some other undeveloped countries (like Ghana, where I was a SEED intern in entrepreneurship) where none of these processes are online and require much more travel, time, and ultimately, money. The United States really is a great place to start your business.


You also likely have in your local community an incredible amount of resources at your disposal. Entrepreneurship advising centers and universities with entrepreneurship departments often provide free services to help serious aspirers get their idea off the ground. This is the case in Logan, Utah, where Motilek Wood Bowties started, and is across most of Utah. Utah has been for years the most friendly state to entrepreneurs. Of course too, there’s no shortage of entrepreneurial blogs, YouTube videos, stories across the internet, and the absolutely genius KickStarter.com.


So you can do it! Reach out to those around you who may have experience, or to professors who are usually glad to offer their advice. Now, let’s jump into the different business types.



Four Types of Business Ownership


  • Sole Proprietorship
  • Partnership
  • Limited Liability Corporation (LLC)
  • Corporation


Sole Proprietorship

A sole proprietorship is ownership of a company under one individual. In essence, you “Do Business As” (DBA) the business you created and you legally are the business, and the business is you. A sole proprietorship is particularly friendly to entrepreneurs in beginning stages. It is easy and inexpensive to start. Filing taxes, too, is a breeze (as long as you track finances). Your personal and business taxes are filed jointly with the only addition being the Schedule C, a simple document to determine whether your business was profitable or not in that year. Sole Proprietors are very common for individuals who are already selling product or providing services and are just required to legalize it.


While a Sole Proprietorship is friendly, it can also be very risky. As mentioned above, you are the business and the business is you. This is to be taken literally. If someone sues your business, they are suing you. if you’re business has to pay something, but can’t, then you must pay the rest of it. This is why many businesses with medical, food, or ‘potentially hazardous’ products or services are safer to start as a Limited Liability Corporation.


Strength: Easy, Quick, and Inexpensive

Weakness: You Hold Liability, Limited Access to Capital



Partnership


A partnership is nearly identical to a sole proprietorship, except that ownership is divided among two or more people. It’s a simple, easy, and quick way to get your business legally registered and going. If your business (or your group of owners) is sued, or must pay back a debt, that liability or debt is incurred upon you as the business owners. You, (and the other owners) are the business. Debts or liabilities can be incurred in different percentages among the owners based on more complex circumstances. While it is a little less risky than a sole proprietorship it is nonetheless still risky.


Under this model, and that of sole proprietors, no lines of credit can be established under the business entity. Any line of credit established is under an individual name and that person is responsible for payments on credit loans, personally. This is a large setback for simpler and easier startups because if your business needs large amounts of capital to get things moving (which they often do) a partnership is not going to be able to get you the amount of credit and/or loans that you need.


Strength: Easy, Quick, and Inexpensive

Weakness: You Hold Liability, Limited Access to Capital



Limited Liability Corporation (LLC)


Unlike a sole proprietorship and partnership, a Limited Liability Corporation is legally a separate entity than the owners themselves. You are no longer “Doing Business As” (DBA). An LLC is a very common go-to for new entrepreneurs because of its safety net. If your LLC company incurs a debt or is sued, then most, if not all of that debt, will lie on the company itself (in most cases). LLCs are popular, too, because they offer many of the flexibilities and ease you would find in partnerships. Unlike Partnerships and Sole Proprietors, LLCs can be sold off, and can easily establish lines of credit under their business. With credit, you have access to much more capital which can result in faster and larger growth. LLCs are not owned by shareholders. Also, taxes are more difficult and tedious under LLC form than in partnerships.


Strength: Limited Liability, Semi-Flexible

Weakness: More Legal Work, Regulation, and Potentially More Taxes



Corporation


Like an LLC, a corporation is a separate entity. A corporation may establish lines of credit and can entirely be sold. Liabilities and debts incur under the business, although a corporation tends to pay more taxes than the other forms of businesses. There is no single owner of a corporation. Rather, it is owned by shareholders, and often governed by a Board of Directors. Corporations also have more regulations to comply with (like legal or environmental).


Strength: Holds all Liability, Allows for Investment, and Access to Capital

Weakness: Higher Tax Rates, More Regulations to Comply With



What Model Should You Choose?

The service or product you provide should ultimately determine what business model you select. Also consider how much capital you have and how much you’ll need. Could you be held liable in any way for your product or service if something were to happen? Perhaps you work in a tight community or on such a small scale that liability isn’t yet a concern. These are all things to consider when starting your business.


Again, starting a business is not as hard as you probably think it is. If you’re ready to start, you can start applying to register your business by just going to Utah.gov, (if you’re registering your business in Utah), or to your state’s website wherever you are. Most of the application process is online, if not all of it, depending on your business type!


Goodluck!


P.S. - I’d love to hear if this helped you learn more about starting your business, and/or encouraged you to act on your idea.


Do you have any questions about what we talked about?

Do you have anything else to add?


Let me know,

Grant @ Motilek


References

https://www.businesswire.com/news/home/20180430006611/en/Amazon-Reveals-Top-10-Entrepreneurial-States-Utah

https://bizfluent.com/info-8162541-four-types-business-ownership.html





2 comments

  • Awesome blog post! I also talked about the four types of business ownerships, and what I loved from what you talked about is that you gave strengths and weaknesses for each of them! That helped me have an even greater look and it also added to the knowledge I already had which wasn’t very much! THANKS!

    Savannah Hobbs
  • Great blog post. I had no idea there were so many options when starting a business. Each is tailored to what kind of business is appropriate for the business owner. Thanks!

    Reagan Cluff

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