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What Types Of Businesses Are Franchises
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Different Types Of Franchise Business Models
Before you can implement your business idea, you must choose the legal structure that will represent its basis.
Read on to learn more about the different types of business structures available for your small business and how to decide which one is right for you.
Different types of businesses qualify for different tax treatment from the IRS and state and local tax authorities.
How you organize your business depends on whether you are operating alone or with a partner, how much personal responsibility you are willing to accept, and whether you want to issue shares to investors to start your business.
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A sole proprietorship is an unincorporated business entity that is owned and managed by one individual. The main advantage is simplicity: a sole trader is the first identification of a business entity for anyone who sells services or products on their own, and does not require special documents. In addition, a sole proprietor has full control over his business and is subject to income tax.
The simplicity of setting up a sole proprietorship is a double-edged sword, as this type of business provides the lowest level of protection for the owner. Sole proprietors are fully responsible for the financial and legal obligations of their company. This means that if your business is in trouble, your bank can reach into your personal assets and pay off your business debts.
A general partnership is the basic form of partnership: a business owned by two or more people. Like sole proprietorships, general partnerships are subject to pass-through taxation, meaning they are taxed only once based on the partners’ individual income levels. In addition, general partners are equal participants in society, which means that everyone has a say.
However, general partnerships are subject to some of the same disadvantages as sole proprietorships. Since there is no legal distinction between general partners and private partners, all owners are unlimitedly liable for the company’s debts and damages. Creditors and plaintiffs can access the partner’s personal property, but the general partner is responsible for the business of all other partners.
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Like general partnerships, limited partnerships are owned by two or more persons and enjoy pass-through taxation. The main difference between LP and GP is the existence of limited partners whose liability is limited to the amount of capital they have invested in the company. Every limited partnership must have at least one general partner, who has unlimited liability.
One of the disadvantages of a limited partnership is that the limited partner generally does not have much say in the day-to-day running of the business. This can be a challenge for partners who are aware of personal responsibility, but also have ideas on how to run the business more efficiently.
The last type of partnership, LLPs, are owned by two or more partners and enjoy pass-through taxation. Although partners in an LLP are responsible for their own conduct, they are not personally liable for the conduct of other partners or the debts and damages of the firm.
The main disadvantage of the business type of LŽU is that it is not applicable to all companies: LŽU programs are specific to certain licensed professions, such as law or accounting.
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A C corporation, or C corps, is one of the most common types of corporations and the preferred ownership structure for large corporations. This is because a C corporation is a legal entity that is completely separate from its owners, thus providing owners with the strongest protection against personal liability.
Another advantage of incorporating your small business as a C corporation is the ease of raising capital. C corps can be financed by issuing shares. You can issue any number of shares and offer both ordinary and master classes.
One of the disadvantages of a C corporation compared to other types of corporations is that each C corporation is a complex business entity that requires a rigorous application and registration process and extensive oversight through bylaws and board appointments.
Most importantly, the main downside to forming a C corporation is that you will not enjoy the same tax status. That is, company C pays income tax twice: from the company’s income and again from the personal income of the owners and shareholders.
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An S corporation or S corps avoids the double taxation problem faced by a C corporation. Like partnerships, S corps are pass-through entities, meaning that instead of paying corporate income tax as a business entity, they are taxed only once, on individual income levels of owners and shareholders.
However, this advantage is offset by limitations on raising capital and the complex requirements of maintaining S corp status. For example, an S corporation can only issue common stock to up to 100 shareholders, and those shareholders must be individuals who are citizens or permanent residents of the United States.
A benefit corporation, sometimes called a B corp, is a type of for-profit corporation recognized by most states in the United States. Although taxed in the same way as C corps, eligible businesses emphasize increasing their positive impact on society, their communities and the environment.
Although a utility may do well and make a profit, it is subject to the same requirements as Company C. In addition, the utility must demonstrate its commitment to the higher requirements by publishing an annual report that assesses its social and environmental performance.
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Limited liability companies combine many aspects of cooperation with the legal entities of traditional companies. LLCs are legal entities separate from the business owners, protecting the owners from personal liability for the debts and damages of the business.
An additional benefit of incorporating your small business as an LLC is the tax flexibility it provides: LLCs can choose to be taxed as a corporation (twice) or as a pass-through entity such as sole proprietorships or S corps.
The disadvantage of setting up a limited liability company is that the process is more complicated than that of a sole proprietorship or partnership. For example, an LLC must write and file articles of incorporation and appoint a registered agent.
A non-profit organization is a company that is exempt from the tax administration on the basis that it advances society in some way for the benefit of the public. Basically, non-profit organizations mainly refer to the tax status of businesses, as most non-profit organizations are set up as corporations.
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The main benefit of establishing your small business as a nonprofit is the tax advantage: If your organization qualifies as a 501(c)(3) tax-exempt organization under the Internal Revenue Code, it will not have to pay federal income taxes.
However, non-profit organizations are extremely limited in what they can do and cannot use their profits for anything other than continuing their business.
A joint venture is essentially a partnership between one or more separate business entities. In these types of business, companies commit resources to accomplish a specific task, often on a temporary basis. This can be, for example, a specific project or the purchase and joint operation of real estate.
The peculiarity of joint ventures as a business structure is that they allow participants to use the resources of other participating companies without losing their independence by merging into one organization. The main disadvantage, however, is that each participant is responsible for all costs and losses of the joint venture.
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Determining which structure is right for your small business is the most important decision you will make on your entrepreneurial journey. Before making a decision, you should consider several questions such as:
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Franchise Marketing: What It Is, How It Works, And Creative Ideas To Try
3-day free trial, no credit card required. By entering your email, you agree to receive marketing emails from various companies. These types differ based on who owns the business, what the business does in the market, and how it operates. The current business environment is dominated by many business entities and joint stock companies.
A sole proprietorship is a business founded and managed by one person. This type of business is very easy to incorporate; The reason why it occupies 74 percent of businesses in the United States alone.
The owner still makes all the decisions, enjoys the profits himself, has pride of ownership, pays less taxes compared to Limited Liability Companies (LLCs), requires very little capital to set up and can be leveraged.