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Starting and
running a business can be expensive, so most start-ups and early
stage businesses operate as sole proprietorships or partnerships.
This is often true of very small businesses, or micro-businesses.
A third operating business structure often employed as a company
grows involves what most people think of when they use the word
"business" - a corporation.
The type of
legal structure a business chooses usually depends on several factors;
the type of business you are in; your potential risk and liability;
the amount of money you need to operate the business; whether one
structure will work better for marketing purposes (a perception
of business sophistication, for example).
- A
sole proprietorship is exactly what it sounds like: A business
operated by one person. This is common in home businesses, small
retail operations, and other micro-businesses. A sole proprietorship
does not mean that only one person works in a business - there
could be several employees as well. It merely means that the business
has been registered with some legal authority as such. In sole
proprietorships, the business owner is, in essence, the business
because tax and liability issues are irrelevant.
- A
partnership
is similar to sole proprietorship in its informality: The difference
is that there are two or more proprietors instead of one. All
issues common to a sole proprietorship are also common to a partnership.
-
An incorporated
company is also often called a limited corporation and is
a legal entity that is separate from its owner or owners. It is
a much more formal business structure, which after being registered
with a government registry, must file annual reports, submit regular
tax returns, pay tax on profits or carry forward losses, and organize
a share structure.
The main reason for incorporation, however is to defer liability:
Owners of the business, called shareholders, have no personal
liability for the company; instead, the liability of the company
is limited to the assets of the company. However, shareholders
elect directors of the company who are responsible for its management,
and these directors could be held liable.
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