In business, a term is often repeated without being defined: “commercial enterprise.” Simply stated, a business is defined as an entity or organization engaged in professional, commercial, or organizational activities designed to meet an economic objective. Most businesses are for-profit organizations or non-profitable entities that work to meet a social objective or further social causes. Businesses may be sole proprietors, partnerships, corporations, LLCs (for- profit), or private associations. The business may be organized locally, statewide, or across the nation and internationally.
In addition, there are two other types of business structure which are often used when there is the intent to profit. One is called the partnership where one or more people to act as partners with one another. Another is called a limited liability company (LLC). A third type is called a C-corporation. However, each has several differences between them as well as similarities.
Limited Liability Company: This is often used to protect personal assets, such as the family home. A limit liability corporation does not have personal assets, such as cars, that must be protected. Also, the partners are not held personally liable for debts of the business. This limits liability, so the owners are able to reap some tax benefits. In addition, the owners are not required to pay taxes on the profits of the business. These advantages are enjoyed by the owners of the limited liability companies.
Profit Sharing: This is a strategic management planning practice that is often used in businesses that are considered to be pass-through businesses. Under this type of business structure, profits are shared among the partners. Commonly, the main article of the partnership agreement will state that the owner(s) will share their profits with each other based on each partner’s performance. However, there may also be other stipulations in the agreement of the profit sharing practices.
Sole proprietorships: This is an appropriate structure for those who do not want to be personally responsible for debts or the business itself. Under a sole proprietorship, the business and all of the owners are considered to be separate entities from the partnership. As a result, there are no joint or even just singular profits. The advantage to a sole proprietorship is that the partners are kept more informed about how the business is performing and so they can make better decisions with the business’ finances.
There are many differences among these three main types of business structures. The differences include which type of personal assets should be protected and how those assets should be utilized. However, commercial law recognizes that businesses can successfully operate even when one or more partners are bankrupt. This is due to the fact that partnerships have the flexibility to absorb the costs that would normally be allocated to all owners. The real estate holdings and other real property assets of the business can easily be transferred to the surviving partner, once the business is no longer operated by them.