What are the 5 basic business structures?

Learn more about the different business structures and how to choose the one that's right for your business, sole trader. An individual merchant is legally responsible for all aspects of the business. If you're starting your business, one of the first things you might be thinking about is how to structure your business. Are you going to go alone or will you form an association? A sole proprietorship is the most basic and easiest type of business to set up.

There is no distinction between the company and you, the owner. You are entitled to all profits and are responsible for all debts, losses and liabilities of your company. You don't have to take any formal steps to form a sole proprietorship, but you do need to obtain the necessary licenses and permits, like all companies. A partnership is a unique business in which two or more people share ownership.

Each partner contributes to every aspect of the business, including money, property, labor, or skills. In return, each partner shares the company's profits and losses. Because partnerships involve more than one person in the decision-making process, it's important to discuss a wide variety of issues in advance and develop a legal partnership agreement. They are not a legal requirement, but they are recommended so that you know from the start how you will make future business decisions.

A corporation (sometimes referred to as a C Corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders who own it, is legally responsible for the actions and debts the company incurs. Corporations are more complex than other business structures because they tend to have expensive administrative fees and complex legal and tax requirements. Because of these problems, companies are generally suggested for larger, established companies with several employees.

A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability characteristics of a corporation and the fiscal efficiency and operational flexibility of a corporation. The “owners” of an LLC are called “members”. Depending on the state, members can be a single person (an owner), two or more individuals, corporations, or other LLCs. Unlike the shareholders of a corporation, LLCs don't pay taxes as a separate business entity.

Instead, all profits and losses are transferred through the company to each member of the LLC. LLC members declare profits and losses on their personal federal tax returns, just as the owners of a corporation would. Usually, a board of directors and elected officials run the cooperative, while regular members have the voting power to control the management of the cooperative. Members can become part of the cooperative by buying shares, although the number of shares they own does not affect the weight of their vote.

Information and guides to help you start and manage your business or company. An individual merchant is the simplest business structure. It's cost-effective to set up, and there are generally fewer legal and compliance requirements. If you operate as a sole trader, there is no legal separation between you and the company.

This means that you are responsible for all aspects of the company, including any debts the company incurs. Unlike operating under the structure of a company, there are no liability limits. For more information on the differences between an individual merchant and a company, visit business, gov, au. An association is two or more individuals or entities that do business as partners or receive income jointly.

In a partnership, control or management of the company is shared. A partnership is not a separate legal entity, so you and your partners are responsible for all of the company's debts and obligations. A formal partnership agreement is common, but not essential. A trust is an obligation imposed on a person, the trustee, to hold property or assets (p.

e.g. Business assets) for the benefit of others (known as beneficiaries). A company is an independent legal entity. This means that you have the same rights as a natural person and can get into debt, sue and be sued.

However, a company has a more complex business structure compared to that of an individual entrepreneur, with higher administrative and creation costs and higher levels of legal liabilities imposed on both the company and the directors. Compare setting up a company and an individual merchant in business, gov, au. If you're starting a small business, you'll need to determine what type of business structure to use. Au has an excellent “Help Me Decide” tool that can help you determine the business structure that best fits your needs and what records you should consider.

Now that you have the basics of business structure, which one is right for your small business?. Small Business Trends is an award-winning online publication for small business owners, entrepreneurs and the people who interact with them. Once you understand the difference between these structures, you can choose the best one for your business. All companies, large and small, belong to one of the five basic structures that define how they are organized, how they work and how they manage aspects such as taxes and liability.

However, a sole proprietorship cannot sell shares in its business to raise money, and the owner is responsible for all of the company's debts and legal demands. Small businesses can choose to organize as a sole proprietorship, partnership, corporation, S corporation, or limited liability company. Two or more people come together to work at a given company and share the profits (or losses) of that company. However, the partners themselves are responsible for business losses and liabilities, and partnerships based on informal agreements can have interpersonal problems when the company is struggling.


Dominic Mccoard
Dominic Mccoard

Avid foodaholic. Infuriatingly humble bacon nerd. Lifelong beer advocate. Total sushi scholar. Passionate pop culture scholar. Typical travel guru.