Which Business Type is Best?
A Small Business can take a variety of forms. Which is right for you? Before you can make that decision, you need to understand what each type of organization is and how they work.
1. Sole Proprietorship: This is a business with one owner running the business under their own name or with a "dba." DBA stands for "Doing Business As." It is the simplest form of business. There is generally no need for any formal business agreement and all income is reported under the owner's social security number. It also provides NO LIABILITY PROTECTION for the owner. All of the owner's individual assets are at risk if the business is sued.
2. Partnership: A partnership is a business that is owned by two or more owners. Ownership is generally divided up into fractions or percentages of the business. It is generally organized around a very simple partnership agreement or no formal agreement at all. Decisions are made by agreement of the owners and the voting power of each owner is generally governed by the percentage of ownership they have in the business. Any one or more owners with more than 50% of the ownership decides what happens with the business. All profits or losses are reported under each owner's own social security number based upon their percentage of ownership. Partnerships provide NO LIABILITY PROTECTION for any of the partners. If the partnership is sued, all of the owners' individual assets are at risk.
3. Corporations: This is they type of business structure used by most large businesses. Corporations are owned by stockholders. The stockholders elect a Board of Directors to make the decisions for the corporation and the Board of Directors elect officers of the corporation, usually a President, Vice President, Secretary and Treasurer. The larger the company, the more complicated the organizational structure, but even the smallest corporations have Shareholders, Directors and Officers. One big advantage of a corporation is that if a corporation is sued the owners of the company (its shareholders) are not personally responsible for the liabilities of the company. The only risk the shareholder has is their investment in the company. They could lose the value of their stock, but not their other personal assets. For small businesses forming a corporation is generally a trade-off between liability protection and a complicated organizational structure.
4. Limited Liability Companies (LLC): This has quickly become the most popular form for small businesses. It provides the simplicity of a partnership with the liability protection of a corporation. The owners of a LLC are called "members" and the members' ownership is reflected as a percentage of the entire business. If the LLC is sued, the only asset the owner has at risk is their investment in the LLC. The personal assets of the members are not exposed to the liabilities of the LLC. The annual reporting requirements of an LLC are also much easier than a corporation. Each year an LLC must file an Annual Statement with the State of Michigan to remain in good standing.
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