Everyone wants to live the American Dream and own a successful business. The expansion of the internet has made it very easy for you to register a company and attract a worldwide audience. However, running a business is difficult, especially within the first two years of operation. It’s stated that 75% of new businesses don’t survive more than three years because of strict competition and the lack of experience.
However, you can protect yourself from losing everything if you know what business type you should be registering. For example, did you know when you register a limited liability company your personal wealth will not be impacted because the banks and loan companies won’t be able to come after you? Today, we’ll be going over the different types of companies you can register when starting out in business. Specifically, we’ll be exploring the following types:
- Companies limited by shares
- Sole proprietorship
- Companies limited by guarantee
- Limited liability partnerships
Companies Limited by Shares
This accounts for the majority of companies registered around the United States, Canada, and the United Kingdom. With this structure, you have completely separated yourself from the company so if anything happens, you personally won’t be held liable. For example, with this type of company, owners have limited financial liability and their personal finances will be protected. If anything happens to the company, the banks can only liquidate the belongings of the company, i.e. inventory, the building, credit registered in the company name, etc. When structuring this type of company, it’s important all lines of credit and purchases are made under the company name.
Some other benefits include:
- The status of “limited corporation” greatly increases your brand and credibility
- You can sell shares to increase cash that’s available
- Increased chance of acquisition by another company
- Owner can easily be passed on by selling your shares
- Larger tax breaks and credits
This type of company can be registered very easily by going online to the local business bureau website. A sole proprietorship is registered under your own name so you are personally liable for financial losses afterwards. It’s a risky type of business model, but people proceed with registration because they have very little start-up money. It’s recommended to avoid this type of business model when starting or switching over to limited liability as you start to grow. The only benefit of such a model is that you’ll pay very little tax compared to any other type of business structure.
Company Limited by Guarantee
This company structure is mostly associated with non-profit organizations, like charities, NGO’s, sports clubs, and membership organizations. When you open a limited guarantee company, you will hold no financial responsibility as most of the debt is protected by guarantors who have invested to support the non-profit cause. This type of company has no shareholders and are funded by a small group of private companies wishing to sponsor your cause and no profits will be distributed to them since they re-invested to help promote the non-profit objectives of the company.
Some other benefits of this type of company formation:
- No financial loss to the non-profit organization
- Higher tax breaks because money is given to charitable causes
- Debt is protected by guarantors
If you will be operating a non-profit organization, then always register this type of business model.
Limited Liability Partnerships
If you will be operating as a partnership, then a limited liability partnership (LLP) is the best type of structure to follow. Normally professionals will register this type of company to make sure everyone has a say in the decision process. Not to mention, the partners are the owners of shares never being sold so they can keep full control of the LLP. However, financial consequences can be huge if one partner decides to pursue fraudulent business deals because the whole partnership will be held responsible.
Some other benefits include:
- Larger tax breaks for everyone in the LLP
- Profits are shared equally amongst all partners
- LLP members can be located anywhere in the world
- You can appoint another company to be part of the LLP (grow company through partnerships)
If you are planning on registering a company, then use this guide to explore your options and decide which type of business works well with your objective. I would recommend a limited liability because you have full control of your company and can sell shares at any time to raise capital. All financial burden will be on the company so your personal finances and assets will be protected no matter what the outcome. I would also recommend consulting a lawyer before getting started so you have all the important information you need.