When you start a small business, it’s natural to assume that you’ll be treated as a sole proprietor. The truth is that there are several types of business structures, and each has its benefits and drawbacks. While they may seem similar, corporations have some critical differences from small businesses. This article has the main differences between starting a small business and a corporation.
But let’s give you a quick breakdown of the most important ones.
Limited liability
Corporations are given limited liability, meaning the owners can’t be personally liable for the company’s debts. That means you’re not responsible for paying off any debts or damages if your business goes under. When you start a small business, you’re accountable for your company’s debts and lawsuits.
Repayments of taxation
A corporation is considered a separate entity that must pay its taxes. In contrast, sole proprietorships are taxed as individuals, which means they use their income to pay taxes on their small business profits. Corporations also pay to double the tax rate of sole proprietorships.
Structural ownership
Ownership in corporations generally comes in many forms, such as common stock (the most common), preferred stock, voting shares, and nonvoting shares. Small businesses typically have one owner who makes all significant decisions about how the company operates.
Bylaws
Corporations have formal bylaws outlining how shareholders must act, while small businesses don’t have standard rules or guidelines for their members’ behavior or decision-making power. This gives partners more flexibility to make decisions without needing approval from other partners than those corporate.
Flexibility
Small businesses generally have more flexibility regarding who can be a partner. Corporations must have a certain number of shareholders who are all adults and must meet residency requirements. Partnership rules are much more flexible and allow minors to become partners, whereas corporations do not allow minors to own stock.
Audit
Small businesses are not required to have an audit. If a partnership has no shareholders, it does not need to be audited. Corporations must have an audit if they have shareholders. If a corporation has no shareholders, it is not required to get audited.
Agreement
Small businesses are not required to have a written operating agreement. Corporations must have an operating agreement equivalent to a partnership agreement.
External financing
Corporations can typically obtain external financing more easily than small businesses. This is because investors usually want to invest in corporations that have a more formal structure.
Conclusion
When starting a business, you’ll need to decide whether to operate as a corporation or a small business. These are two very different types of organizations. The most important thing you need to know when deciding between these two business structures is how much risk you’re willing to take on.