Business Types

Types of Business

When starting a business for the first time; a person has to ask itself a question about the businesses organizational form. Which type of business organization is right for me? There are three legal forms that business is conducted by: sole proprietorship, partnership and corporation. The following paper will discuss these three forms and which would work for which kind of business, among other important facts.

The first is a sole proprietorship; this is a business with one owner. The owner would be responsible for all debts of the business. The income from the business would not be taxed as a business; instead all the income subject to taxation would be taxed to the owner. A sole proprietorship avoids the expense of forming a partnership or corporation, and is the easiest and cheapest way to start a business. Most individuals start businesses using this method because they’re aren’t aware of the other forms of business. (My Own Business, 2007).

Second, there can be a partnership. In a partnership there are two or more persons as owners. There are also two more elements that each person has to agree to in order for a partnership to form; they have to share a common interest in the business and share the profits or losses. There are two kinds of partnerships, general partnerships and limited partnerships. The only difference is that the partners’ dept is limited to the contribution each has made in a limited partnership; this is known as LLP. The partners should have a formal document drawn up to state all agreements; this document is called the articles of partnership. (My Own Business, 2007).

Lastly, a corporation can be formed. The articles of incorporation are the formal application for a corporate charter. A corporation is created under the states law and provides limited liability for the investors. “None of the shareholders in a corporation are accountable for the debts of the corporation. Creditors can look only to the corporation's assets for payment. The corporation files its own tax return and pays taxes on its income. If the corporation distributes some of its earnings in the form of dividends, it does not deduct the dividend in computing its taxes, but the shareholder recipients must pay taxes on those dividends even though the corporation