Business

Types of Business Structure

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Written by Andrew Collins

A business is defined by the US Department of the Treasury as any single entity or association undertaking a specific activity for earning a profit. A business can be either for-profit or non-for-profit enterprises that conduct primarily to meet a charitable purpose or further an educational objective. The activities of a business may include the production and sale of goods and services, real property, accounts, supplies, and advertising. A business incorporates itself into the corporate form of a legal entity in which the owner maintains direct and indirect ownership interest. This direct ownership creates the distinct advantage of control over the business.

In many countries, a business structure known as the Limited Liability Company is chosen for tax purposes. It is recognized as one of the most professional business structures. The main advantage of a limited liability company is its ability to restrict the liability of the shareholders or owners of the business. The main advantage of such companies is that they are easier to set up and run than many other business structures. However, there are disadvantages too. These include lower profits and capital gains, inability to obtain loans, inheritance issues with respect to relatives of the owners, and inability to engage in international trade.

The other business structure commonly adopted is the Corporation. A Corporation is formed as a separate entity from its shareholders and is governed by the laws of the country in which it operates. A US citizen can become a director of a corporation without being personally liable for the actions of the company. There are generally no restrictions on what types of business transactions can be made through a corporation. The only limitation is that the shareholders cannot be a number of people or a specific amount of money.

A limited liability company is organized similarly to a partnership. The main difference between the two structures is that a partnership has a governing board and primary owners, whereas a corporation does not. A LLC stands for Limited Liability Company. This means that the shareholders of the business are solely liable for the company’s activities and the owners can only lose money if they are part of the LLC.

Like partnerships, corporations can have their debts consolidated. If one or more of the partners is bankrupt, the debts of the LLC will be paid off by the courts. However, there is one major limitation of this type of business structure. If the partner who is bankrupt leaves the LLC, the debts of all LLC members will still be outstanding.

Another way to organize businesses is to use a corporation as a separate legal entity from the owners. In this type of arrangement, the partners own a percentage of the corporation instead of a single share. These shares have greater liability and profit flexibility. Many corporate attorneys prefer this structure over other ones because it limits the personal liability of the partners.

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About the author

Andrew Collins

Finance and Business News Blogger and father of 3, husband, dog walker and fisherman. Love connecting with new people.

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