“It is far better to be alone than to be in bad company.”
George Washington
There are a number of types of companies out there.
Each has their benefits, drawbacks, durations, liabilities, and tax structures. These are just a handful of the most common companies out there. First, let’s clarify the characteristics of companies.
What does Duration mean?
This explains how long the company can be around before needing to make certain actions to prolong their life.
What does Liability mean?
The partners and owners responsible for debts assumed by the company.
What does Taxation mean?
This describes how the company is taxed, for example as a single stand alone entity or the owner may be taxed as personal income.
| Type | Description | Duration | Liability | Taxation |
|---|---|---|---|---|
| Sole Proprietorship | Run by one person, cheap to set up and frequently set up as a DBA (Doing Business As) | Limited to life of proprietor | Unlimited liability. The equity (money) is limited to the proprietor’s personal wealth. | Taxed as personal income |
| Partnership | General partnership: Two or more partners starting a company. Limited partnership: Two or more partners, by some partners are limited liability to only the amount of their investment. | Limited, non-transferable | Unlimited liability. The liability is spread across the partnership if things turn south. | Taxed as personal income |
| Corporation | Shareholders, directors and corporate officers are the main interested parties, but also customers, employees, and suppliers. | “Evergreen” or Perpetual or Unlimited ownership and easy to transfer | The most complex. The liability of a corporation does not affect the personal owner or shareholders of the entity. | Double taxation: corp. pays tax, then shareholders taxed on dividends |
| LLC (Limited Liability Company) | Cross of a partnership and a corporation. In some states, an LLC may have only one member. | No set duration. Typically permitted to conduct certain transfers to closely related people (e.g. immediate family) | A merger of a corporation and sole proprietorship or partnership, the LLC shields owners from personal liability. | No double tax; Income passes through and is then taxed as personal income. |
| LLP (Limited Liability Partnership) | Unincorporated business owned and run by multiple people whose assets are protected. | Perpetual succession | Liabilities are spread across partners and based on what they input into the company. | Generally, the business entity does not pay federal income taxes on its profits. Instead, the company’s profit or loss passes through to the owners’ tax returns and is subject to tax at the applicable individual income tax rate. |
| LLLP (Limited Liability, Limited Partnership) | General partner with some limited partners. LLLPs cannot be formed in some states. | No set duration | General partners have limited liability, and partners are protected from liability | The businesses are not expected to pay income taxes, but the owners are as a pass through. The income, profits, and losses of the company pass through to its owners. |
Looking to launch a company?
Visit our Resources center for tools to use before and during your tenure in business.
Also, check out the SBA for guidance on the ways to start a company, from deciding on the business structure to obtaining business insurance.
