Types of business Structures: Which one is the best?

business, legal

You’ve got a brilliant business idea and are so excited to turn the idea into reality. But before you start, you realize that there is a crucial step you should take: choosing the right business structure. This decision is crucial and will impact your business in several ways, from liability protection to taxes and management.

Selecting the most suitable business structure can seem daunting, especially with terms like LLCs, company, and sole proprietorships swirling around. But don’t worry, once you finish reading this post, you will have an idea of what business structure suits you the most.

Types of Business Structures

1. Sole Trader / Sole Proprietorship

A sole trader or a sole proprietor is someone who owns the business and has full responsibility and control over the business. In this case, the business will be traded under your name. However, you can register a business name if you wish to operate your business under a different name.

Liability: Unlimited liability (Personal assets are at risk)
Tax: Profits are taxed on personal income

2. Partnership

Partnership has a business structure similar to a sole trader or sole proprietorship, but as the name suggests, it involves two or more co-owns and runs the business.

Liability: Unlimited liability for all partners (personal assets are at risk)
Tax: Profits taxed on personal income

Limited Liability Partnership (LLP): Offers limited liability protection, it requires one or more general partners, with unlimited liability and one or more partners with limited liability.

3. Company/Corporation

A company or a corporation is a separate legal entity from its owners, which is what most people are familiar with.

Liability: Limited liability protection for your personal assets.
Tax: Corporate tax on profits (lower tax rate). Potential double taxation (companies pay corporate tax and shareholders pay tax again when they receive dividends.)

In Australia, this is the Primarily Proprietary Limited Company (Pty Ltd), where the US has two main types: C corporation and S corporation.

4. Trust

A legal arrangement where your assets (property, money, etc) are held by a trustee (a company or individual) and are redistributed to beneficiaries (you or your family).

Liability: Depends on the trust structure
Tax: Depends on the trust’s purpose and beneficiaries

Watch this short video to understand what a Trust is:

Check the government website to understand the key differences between them.

5. Limited Liability Company(LLC) – The U.S and Canada

Similar to a company or corporation, but commonly used for small businesses and startups.

Liability: Limited liability protection
Tax: Pass-through taxation – a company does not pay corporate tax on profits. Avoid double taxation by “passing through” to owners’ personal income.

Summary: Which one Is the best for You?

When choosing the correct legal structure for your business, it is important to consider factors such as how much liability you are willing to accept, costs, and taxation. Professional advice is recommended when choosing the most suitable business structure.

However, if you are just getting started, sole trader or sole proprietorship is the simplest and cheapest option. You can always switch to a different structure once your business grows and becomes more profitable.

“Unleash your potential and achieve financial freedom”

Celestial Millionaire

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