Understanding the Different Types of Small Businesses
Written by Eddy Hood
Are you looking to start a small business? You may be wondering about the different types of small businesses that exist and how to make your endeavors more successful. There are six main types of small businesses, each with different financial structures and bookkeeping needs. These structures relate to how taxes, ownership, finances, and liabilities are handled. Find the one that suits your small-business idea here:
A sole proprietorship is by far the most common type of small business, with ownership falling to one person or married couple. Sole proprietors have greater flexibility and fewer tax responsibilities, but they are held responsible for all potential debts that the business may incur. As a result, they sometimes have trouble raising funds.
Costly administrative fees mean that corporations must be larger, often well-established companies. This type of entity is also taxed twice, once at the corporate level and once at the shareholder level. A corporation is a legal entity owned by shareholders. The corporation is responsible for liabilities and debts, but the shareholders own the business. When people talk about the idea of “going public,” they’re talking about selling their ownership to the public. To do so, the company must be a corporation.
When two or more people share ownership responsibilities of a company, they have a partnership. There are three main types of partnerships: general partnerships, limited partnerships (which limit liabilities and input for one or more partners based on the percentage of investment), and joint ventures (which is limited by a period of time). Those looking to form a partnership should probably have an excellent, well-established, and professional relationship with a potential small-business partner.
Limited Liability Company (or LLC)
An LLC combines the concept of a corporation with the concept of a partnership. It’s a hybrid in which the owners of the company are protected from liability to a level. In an LLC, owners are referred to as “members” (which can be one or more individuals, other corporations, or even other LLCs). It is one of the most flexible entity forms and is usually a good option for new businesses. The cost to set up and maintain an LLC is very low.
An S-Corporation may have advantages over a normal corporation (or C-Corporation). This entity type avoids the double taxation that a normal corporation must incur and provides owners with a vehicle for tax savings. There are rules that must be followed though including how payroll is distributed and the number of shareholders it can have. Once an LLC gets profitable enough, it may make sense to convert to an S-Corporation to reduce tax liabilities.
A cooperative or “co-op” is an unusual type of small business that is most similar to a nonprofit. In simple terms, a cooperative is a business that belongs to the members who use it. In other words, the user is the owner. In fact, members are often called “user-owners” or “member-owners.” The members need to have bylaws, like a nonprofit does, and often vote for directors among themselves. Everyone has equal say; the amount of shares one owns does not affect one’s vote. This democratic organization requires frequent participation from members to function.
So which choice would be good for your small business? Types are many and varied, so it’s important to consider the pros and cons of each before settling on one. We’ve provided a bit more insight here:
Which Should I Choose if I Am…
- A startup? Any one of the above choices could be a viable option, though it’s not necessarily recommended to become a corporation or S corporation when you’re just starting out.
- A one-person, online freelancing business? You are most likely a sole proprietor, but an LLC may also be a good option for you.
- A "main street" restaurant? Out of all of the different types of small businesses, you are most likely going to succeed with a sole proprietorship. A partnership or LLC is also an option here.
- A legal or consulting firm? Partnerships are the most popular choice here, as lawyers, doctors, and professionals often work in teams of two or three.
- A warehouse community for new, upstart artists? A cooperative will serve you well. Do make sure that you have efficient plans for marketing to and engaging with that group.
Have you thought about your small business’s accounting needs yet? With outsourced accounting services from Ignite Spot, you can financially organize and succeed with your small business. Types, differences, and financial options are plenty, so feel free to contact us for advice or download our pricing guide.