One of the first decisions that a person needs to make is how the company should be structured. The four basic legal forms of ownership for small businesses are a Sole Proprietorship, Partnership, Corporation, and Limited Liability Company. There are advantages and disadvantages as well as income tax ramifications associated with each type of organization. What follows is a brief description of the different types of organizations.
Most small business start out as sole proprietorships. These firms are owned by one person who is normally active in running and managing the business.
A partnership is two or more people who share the ownership of a single business. In order to avoid misunderstandings about how profitslosses are shared , whose responsible for what, and other management, ownership, and operating decisions the partners normally have a formal legal partnership agreement.
A corporation is an organization that is made up of many owners who normally are not active in the decision making and operations of the business. These owners are called shareholders. Their ownership interest is represented by certificates of ownership (stock) issued by the corporation.
The LLC is a relatively new type of business structure that combines the benefits of a partnership and corporation. All the different types of organizations that I told you about have some unique methods and rules for accounting for their transactions associated with their equity (ownership) accounts.