If you are wondering what are the Different Business Entities for Your Business this article should help clarify a few things for you.
Whether you are starting a business or already have an operating one, you need to consider a few things which includes organizational structure or how your business will operate or continue to operate. There are different business entities, each with their own advantages and risks. Let us go through each one.
Sole Proprietorship
As the name implies, a sole proprietorship is a business where there is only one owner of the business who shoulders all the burden related to the legal and financial aspects. You receive all the profits and are required to pay off all the debts. If the business goes under, creditors can pursue and claim your assets as collateral from the damage they incurred.
Partnership
This business entity takes a little bit of risk from your shoulders. You build a business with a few trusted partners who also have authority to make executive decisions as regards the company. You will divide the profits among partners and you don’t have to make all the decisions by yourself. However, the actions made by partners are legally binding for each of you, so if they make a mistake all of you must pay the consequences.
Corporation
This is a separate legal entity that operates under its own name. Basically, your business has a life of its own when you create a corporation. When the business goes bankrupt, investors and creditors cannot take shareholder assets instead they can only claim assets of the corporate entity. However, you will not receive the most returns as multiple investors and creditors will stake their claim in the business.
LLC
LLC stands for “Limited Liability Company”. This is the simplest form of business structure to protect your personal assets in the event that your business should be sued for any reason. LLC’s can be owned by as few as 1 owner. Owner’s of an LLC are called “members”, and an LLC with more than one owner is referred to as a “Multi Member LLC”. The advantage of forming your business as a LLC as it provides you with the personal protection against lawsuits, and at the same time, it cuts down on the amount of paperwork required by other entities, especially compared to a corporation. In addition, an LLC is not subject to what is known as “Double Taxation”. Forming as an LLC also adds credibility to your business.
How to Build Business Credit in 2019
Two main factors are considered when you want to build a good business credit: capital and revenue stream. This is what financial institutions would look for when you try to apply for credit. One framework used is the Five Cs of Credit.
Capital
When you have proven that you have enough assets based on investments you made out of your own pocket, then it will be much easier for your bank to loan you some money.
Capacity (Revenue Stream)
If your business has a consistent cash flow, then that is a good sign that you will have the capacity to continue as a going concern. Since the purpose of going into business is making money, this will ensure financial institutions that their loans will not go to waste rather it will grow in your hands.
Collateral
This refers to how much backup assets you have to pay the bank just in case things don’t pan out exactly as planned. This is their way of having an insurance on the loan.
Character
Do you pay back your loans on time with interest? If banks know that you do not have a good credit record, then that will bring you down a peg and decrease your chances of building business credit.
Conditions
What is the current business climate? What does the business plan to do with the loan? Based on analysis of existing market environments, your business may be declined if you want to loan for expansion especially if you cannot provide proof of growth and potential.
Conclusion
So those are just some tips on what you need to know regarding the different business entities before going into business or expanding your business, and how to build your business credit.