A small business is generally a privately owned and operated organization, which works with a small number of employees and deals in relatively low volume of sales as compared to bigger companies.
Besides the number of employees, other factors, such as annual sales (turnover), value of assets and net profit (balance sheet) are also considered to classify any business as a small one. Here are some common types of small businesses.
Sole proprietorship is a type of business model in which there is just one owner who has all the rights to take decisions. All debts of the business are his personal debts and whenever required, they must be paid from his personal possessions.
As there is no partnership in the business, the sole proprietor enjoys unlimited freedom within the precincts of his workplace. Sole proprietorships are easy to start up with relatively fewer regulations and full control over the business. If the business is doing good, the owner takes all the profits.
It is very different from a corporation, as instead of paying corporate taxes, the sole proprietor pays self-employment taxes on the profits made, making accounting much simpler.
He also does not have to be concerned about issues like double taxation, as a corporate entity would. Sole proprietorship is the easiest way to form a business and compared to other business structures, it is subject to the fewest regulations.
Partnerships are generally preferred over corporations because of the levied taxes. However, in a partnership the members may be exposed to greater personal liability as compared to the shareholders of a corporation, depending on its structure and the jurisdiction in which it operates.
Unlike sole proprietorship, the right of making decisions is distributed amongst the partners in this type of small business. Generally an agreement prepared by a lawyer is signed by all the members who want to form a partnership.
This agreement clearly states the terms and conditions of the partnership, the sharing of profits or losses and the distribution of common assets in case the partnership ends. Every time a new member joins the partnership, it is necessary to sign the agreement paper again.
A Close Corporation is a form of business ownership which combines the aspects of sole proprietorship and partnership. This model of business is particularly helpful and suitable for small to medium-sized enterprises.
A close corporation is almost like a company but less expensive and easier to run. It is also known as CC and can be easily registered through a lawyer or an accountant.
Unlike a company, a close corporation does not have directors, shareholders, or a chairperson of the board. Suppliers of a close corporation often ask for a signed security from a trusted third party, to ensure the payment of debts in case the CC fails to do so.
Limited Liability Partnership (LLP)
A limited liability partnership is almost similar to a general partnership. However, in this type of business entity, none of the partners are liable for the actions of others. This helps a member to stay clear from another partner's misconduct or negligence. In case any one of the partners dies, the limited liability partnership automatically ceases.
The formation of a small business and the blueprint of its installation is solely decided by factors, like the number of members and the initial investment. In case one wants to start a small business, one should get a brief idea of the laws governing them.