What Are the Four Primary Business Models?
Of the four primary business models, each has its own rules and regulations. Many states and localities also place regulations on business structures. There are advantages and disadvantages for each one. It is important to begin a business with the right model to avoid problems associated with changing your business model later.
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Sole Proprietor
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The sole proprietor business model may be the easiest of the four business models to begin and maintain. If you are opening the business in a physical location, check zoning restrictions, fictitious name filing and licensing requirements at the local municipal or county government offices. In a sole proprietor business, the owner is responsible for all debts and taxes for the business and every aspect of the management of the business.
General Partnership
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If the owner of a sole proprietor business takes on one or more partners, it becomes a general partnership. New businesses can also be formed as general partnerships, in which all parties have equal responsibility for the business. The additional partners do not have to be other people; they can be a company or corporation. The No. 1 guideline in determining whether there is a partnership is whether another entity shares in the business profits. Business losses are also shared equally among all partners. In an unlimited liability partnership, the personal assets of each partner can be used to pay off creditors if the partnership does not have sufficient assets to cover the obligations. Special references to this can be addressed in a contract for that purpose.
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Limited Partnership
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A limited partnership is formed by two or more people. There are general partners and limited partners. The general partner is active in the company and has unlimited liability for the debts of the company. Limited partners are investors and have no part in running the company. The limited partner may provide cash, land or a service. This also means that the limited partner has limited liability. Personal property of the limited liability partner cannot be used to pay debts of the partnership.
Corporation
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A corporate business is considered an entity or person of its own. It is separate from the person who actually owns the business and is formed when a federal or state statute allows the enterprise to be created. Each owner or shareholder has limited liability in regard to the obligations of the corporation. According to U.S. law, a corporation is a created legal person. It is treated as a person under the law, and is governed by many of the same laws that govern a human person. A corporation is considered a citizen of the state of incorporation and a citizen of the state in which the physical business is situated.
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