What is a business? That is a question many ask, and the answer varies depending on who you ask. Businesses cover a wide spectrum of endeavors from shopping malls to international corporations. A business, therefore, is defined simply as a legally registered entity or act characterized by the activity of earning a profit through an enterprise. For the purpose of this article, a business can be any entity, whether publicly traded, privately owned or owned by a family or other group.
A business structure is determined by the nature of the entity. If the activity of the enterprise consists of selling and buying products and services, the enterprise is a retailer. Likewise, if the activity of the entity takes the form of manufacturing and distributing products and services, the enterprise is a manufacturer. If the activity of the entity takes the form of providing a service, the enterprise is a service provider. However, when speaking of corporations, the term corporation refers not to individual businesses but to unincorporated associations such as partnerships, limited liability companies (LLCs), and corporations organized as partnerships.
One of the most common business structures is the limited liability company (LLC). This form of corporation is established to enable an owner to avoid being personally responsible for the debts and obligations of the corporation. The assets of the LLC are legally divided between different shareholders. If one or more shareholders fail to meet their obligations, the assets of the LLC are temporarily distributed to the LLC owners. Thus, it is important to note that the limit of liability of an LLC is 10 times that of a corporation.
A corporation is another common business structure. In a corporation, the board of directors generally consist of only a single director. In a limited liability company, the board of directors of the LLC are all members of the LLC. Because of the combined voting power of the general shareholders of the LLC members, there is little danger that the LLC will default on its obligations to its creditors, which can result in expulsion from the business structure.
A sole proprietorship or partnership is another option for new entrepreneurs. Unlike corporations and limited liability companies, sole proprietorship does not have an executive officer or director. However, because of its simplified structure, it is often referred to as a “pass-through” entity. What this means is that the profits of the business are taxed only once, even though income is generated from the business itself. For many small businesses, the single tax rate associated with sole proprietorships is too high. To remedy this problem, a “pass-through” entity may be created that will pay taxes on the income of the business even when it is not being actively managed by the owner.
Some individuals may need the legal protection afforded by corporations and limited liability companies, but they may need additional protection from personal liabilities. If the sole proprietorship is sued, it may be difficult for the owner to pay for legal fees and be repaid at the end of the business. Also, the owner may need to cover his or her own legal expenses if he or she has made any misstatements in the books or records of the business. Finally, there is the risk that, if the business is sued, the defendant will not have access to any of the personal assets owned by the LLC. For these reasons, many small entrepreneurs do not choose to create an LLC.