Starting a business, is it for me?
2020 proved to be a year of the contracted economy with high unemployment rates and disrupted businesses crafted a new 'normal', but also a year where many professionals shifted to business for sustained livelihood.
But, despite these unprecedented situations, entrepreneurship is a common path chosen by visionaries with ideas to create something magnificent, better than the rest. However, the journey is not an easy one.
So, how do I understand whether I should walk this path or not, and if yes, what business can I start?
Yes, there are different types of businesses that should be able to align with your goals. Whichever form of business you choose, be it sole proprietorship, partnership, corporation, and Limited Liability Company, or LLC, these business form will affect how you are taxed, your legal liability, costs of formation, and operational costs.
Judge any business on the basis on the cost of setting up, business registration, ownership control you want, taxes, and liability. Be it multi-owner business or single owner business, each type serves a specific purpose. Hence, analyse which business type is most suitable to your business niche and goals.
Let's understand different types of businesses and which one is best suited for you:
Owned and run by someone for their benefit, a sole proprietorship is entirely dependent on the owner's decisions, hence when the owner dies, so does the business.
While you will be subject all the profits, have total flexibility when running the business, and will only require a business licence to start with, you will also be 100% liable for your business debts, equity is limited to your resources, and ownership is difficult to transfer.
If you are looking to start a small business and want the control of your business, then choose this type of business as they are never subject to acquisitions like corporations, and strategic control cannot be transferred without the full consent of the business owner.
If you have like-minded people with you, you can start a partnership firm. You can choose between general partnership where both owners invest their money, property, labour, etc. to the business and are both 100% liable for business debts or limited partnership where partnerships require a formal agreement between the partners where the partners are limited to their liability for business debts according to their portion of ownership or investment.
With shared resources provides more capital for the business, you will be sharing profits and debts equally as well, with similar flexibility and simple design of a proprietorship, it will also be difficult to sell the business or finding a new partner: and with inexpensive to establish a business partnership, formal or informal, any partners decided to end the partnership will end it.
A partnership is a great option for individuals who can work together to offer solutions. It can be technical and marketing professionals, or doctors, dentists and solicitors who can partner to benefit from the shared expertise of partnership firms.
Unlike the above-mentioned types of business, corporations are separate entities and are considered a legal person for tax purposes. Their profits and debts belong to the corporation only and are charged under the personal income of the corporation. This is followed with, any income distributed to the shareholders as dividends or profits are taxed again as the personal income of the owners.
While you enjoy limited liability, it is also easier to transfer to new owners, the cons you have to face are costly corporate establishment and operations, complex paperwork and as mentioned above with some exceptions, corporate income is taxed twice.
Usually, corporations are set up by a group of shareholders who have ownership of the corporation, represented by their holding of common stock, to pursue a common goal i.e. to earn profits like Microsoft Corporation, Coca-cola company, and Toyota motor corporation
As the name suggests, an LLC provides owners with income advantages. Essentially, the advantages of limited partnership and corporations are combined in an LLC as with limited liability for debts or losses, the owners share the profits of LLC without double-taxation.
It also mitigates some of the disadvantages of each like limited ownership by certain state laws, comprehensive and complex agreements, high establishment costs due to legal and filing fees.
Single Member LLCs or SMLLC is unique as it is taxed as a sole proprietorship, even when it offers the same ownership type and liability protection.
LLC is a good choice for medium- or higher-risk businesses, owners with significant personal assets they want to be protected, and owners who want to pay a lower tax rate than they would with a corporation.
CHOOSE A BUSINESS STRUCTURE
Now, having mentioned all these types, in the upward trending start-up culture, you can choose a business structure which is best suited for is the first step in the journey to becoming your boss.