Different Business Ownership Structures

Before you receive your first payment for products or services, you'll need to nail down
ownership structure. Let's take at various forms of business ownership you might consider,
depending on your circumstances: 
Corporation 
If you have multiple owners or stakeholders in the mix, you'll also have a number of people
with personal assets to protect. This business entity is established when these owners are
transformed into shareholders through articles of incorporation. The percentage of ownership
may equate to the percentage of shares received by each individual with a vested interest in
the business. The main advantages of corporations are that they are treated as an individual
entity and any personal holdings of owners cannot be attached— if the business fails to meet
debt payments or other obligations. 
Limited Liability Company
Similar to a corporation, personal assets of owners are shielded from liability but an LLC is not
treated as a sole entity. Profits or losses are passed on proportionately to owners who file these
amounts on their own tax returns. 
Partnership
In a general partnership, all partners share in profits and liabilities. Limited partnerships are
formed to protect the personal assets of one partner from potential liabilities or financial
judgments incurred by another owner. Profits and losses are otherwise shared proportionately. 
Sole Proprietorship
When starting a sole proprietorship, it's all you. You're directly responsible for all decisions,
profits, losses and liabilities resulting from the operation of the business. You typically report
revenues and expenses on IRS Form 1040 Schedule C, which either adds profits to or deducts
losses from your other reported taxable income. This is the most common form of business
ownership in the United States with about 73% of all small businesses registered in this
manner.     

Different Categories of Sole Proprietorships 

While legal and tax requirements have no differences among them, there are a few different
subcategories of business that informally fall under the umbrella of a sole proprietorship
business. 
Here are three types of sole proprietorships to examine when starting a new business, and we
examine the characteristics of each:
Self-employed and Freelancers
These individuals may come from any type of background or pursue any kind of work and the
vast majority of these are one-person operations. You might find consultants, writers or graphic
artists who fall under the freelance tab and likely work from home without a ton of capital tied
up in the business. In many cases, freelancers ply their trades on the side and may have full-
time day jobs.
Comparing freelance versus self-employed folks, it may be splitting hairs but the latter group
could be seen as depending entirely on revenue from sole proprietorships as their primary
source of income, and the pursuit is a full-time endeavor. This might include a small retail
business that employs family members or perhaps a non-related part-time worker. 
Independent Contractors and Subcontractors 
Under this category fall a number of potential operations but you might think of the
construction trades when you hear these terms. Plumbers, carpenters, and electricians would
fit the mold of an independent contractor when they're securing jobs on their own. 
By contrast, when an independent contractor is hired by a general contractor (GC) overseeing
operations on a multifaceted commercial project, for example, independent contractors can
also double as subcontractors, receiving payments from the GC that are reported on an IRS
1099 Form. 

Franchises
The tax reporting and ownership structure may be the same, but a franchise must often
conform to a prescribed way of doing business. That method is reflected in operating and
marketing strategies laid out by the franchisor or organization that holds licensing rights to or
trademarks on names, products, logos, etc. So, while a franchisee may have some autonomy
with management style, there's little to no control over brand appearance, quality and
consistency. 
Legal and Administrative Considerations 
In setting up a sole proprietorship, you won't find any differentiation in the way taxes are filed
and paid. 
All income and expenses flow to a personal reporting form. The same holds true when you
register sole proprietorship with federal, state or local government authorities. Unless you
apply for an employer identification number (it's not mandatory), you can simply use your
Social Security number when filing taxes or applying for business financing. 
You'll encounter variation when it comes to licensing and certifications. A self-employed
financial consultant may obtain a license to sell insurance and securities but a stylist who
maintains their own salon will pursue a state certification in cosmetology, for example. 
These differences will also define the type of risk setting up a sole proprietorship and
the business insurance plans you'll need in place to protect your assets. A freelance skydiving
instructor will have very unique insurance needs as opposed to a self-employed personal
trainer. That's somewhat of an extreme comparison but you get the gist. Should the risk the
great or small, you'll need to gauge sole proprietorship liability.
Different Business Ownership Structures
Before you receive your first payment for products or services, you'll need to nail down
ownership structure. Let's take at various forms of business ownership you might consider,
depending on your circumstances: 
Corporation 
If you have multiple owners or stakeholders in the mix, you'll also have a number of people
with personal assets to protect. This business entity is established when these owners are
transformed into shareholders through articles of incorporation. The percentage of ownership
may equate to the percentage of shares received by each individual with a vested interest in
the business. The main advantages of corporations are that they are treated as an individual
entity and any personal holdings of owners cannot be attached— if the business fails to meet
debt payments or other obligations. 
Limited Liability Company
Similar to a corporation, personal assets of owners are shielded from liability but an LLC is not
treated as a sole entity. Profits or losses are passed on proportionately to owners who file these
amounts on their own tax returns. 
Partnership
In a general partnership, all partners share in profits and liabilities. Limited partnerships are
formed to protect the personal assets of one partner from potential liabilities or financial
judgments incurred by another owner. Profits and losses are otherwise shared proportionately. 
Sole Proprietorship
When starting a sole proprietorship, it's all you. You're directly responsible for all decisions,
profits, losses and liabilities resulting from the operation of the business. You typically report
revenues and expenses on IRS Form 1040 Schedule C, which either adds profits to or deducts
losses from your other reported taxable income. This is the most common form of business
ownership in the United States with about 73% of all small businesses registered in this
manner.     

Different Categories of Sole Proprietorships 

While legal and tax requirements have no differences among them, there are a few different
subcategories of business that informally fall under the umbrella of a sole proprietorship
business. 
Here are three types of sole proprietorships to examine when starting a new business, and we
examine the characteristics of each:
Self-employed and Freelancers
These individuals may come from any type of background or pursue any kind of work and the
vast majority of these are one-person operations. You might find consultants, writers or graphic
artists who fall under the freelance tab and likely work from home without a ton of capital tied
up in the business. In many cases, freelancers ply their trades on the side and may have full-
time day jobs.
Comparing freelance versus self-employed folks, it may be splitting hairs but the latter group
could be seen as depending entirely on revenue from sole proprietorships as their primary
source of income, and the pursuit is a full-time endeavor. This might include a small retail
business that employs family members or perhaps a non-related part-time worker. 
Independent Contractors and Subcontractors 
Under this category fall a number of potential operations but you might think of the
construction trades when you hear these terms. Plumbers, carpenters, and electricians would
fit the mold of an independent contractor when they're securing jobs on their own. 
By contrast, when an independent contractor is hired by a general contractor (GC) overseeing
operations on a multifaceted commercial project, for example, independent contractors can
also double as subcontractors, receiving payments from the GC that are reported on an IRS
1099 Form. 

Franchises
The tax reporting and ownership structure may be the same, but a franchise must often
conform to a prescribed way of doing business. That method is reflected in operating and
marketing strategies laid out by the franchisor or organization that holds licensing rights to or
trademarks on names, products, logos, etc. So, while a franchisee may have some autonomy
with management style, there's little to no control over brand appearance, quality and
consistency. 
Legal and Administrative Considerations 
In setting up a sole proprietorship, you won't find any differentiation in the way taxes are filed
and paid. 
All income and expenses flow to a personal reporting form. The same holds true when you
register sole proprietorship with federal, state or local government authorities. Unless you
apply for an employer identification number (it's not mandatory), you can simply use your
Social Security number when filing taxes or applying for business financing. 
You'll encounter variation when it comes to licensing and certifications. A self-employed
financial consultant may obtain a license to sell insurance and securities but a stylist who
maintains their own salon will pursue a state certification in cosmetology, for example. 
These differences will also define the type of risk setting up a sole proprietorship and
the business insurance plans you'll need in place to protect your assets. A freelance skydiving
instructor will have very unique insurance needs as opposed to a self-employed personal
trainer. That's somewhat of an extreme comparison but you get the gist. Should the risk the
great or small, you'll need to gauge sole proprietorship liability.