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Franchising

Franchising is a hybrid business model that combines the features of a corporation with those of a sole proprietorship. Franchising makes it possible for the owner of a business to grow it by selling the rights to use their brand or business model rather than building new units on their own. A franchise can be a great option for a beginner entrepreneur who wants to start a business, but not from scratch. Instead, they can follow an existing, successful business blueprint (Joseph, n.d.).

Joint Ventures

This type of business is one where two or more parties, typically businesses, pool their expertise and resources to accomplish a common goal. In such an arrangement, the profits, losses, and costs of the resulting enterprise are jointly shared. Businesses form joint ventures for various reasons: development of new products, business expansion, or venturing into new markets, especially overseas. A joint venture offers access to established markets, more resources, greater capacity and distribution channels, and increased technical knowledge (Info Entrepreneurs, n.d.).

Equity Partnerships

An Equity Partnership is a joint venture between individuals who pool their capital, skills, and resources to achieve greater revenue and growth from their investments. The joint venture could be set up in various ways (ANZ, n.d.). One of the risks of an equity partnership is that your partner has the right to question business decisions even though they may own a lower percentage of the business. The benefit to all equity partners who have full voting rights on important business decisions is that it can result in greater accountability and better decisions being made. Other benefits include accelerated company growth and sustainability (Curley, 2011).

Subsidiaries

When one company buys another, the acquired company becomes a subsidiary of the purchasing company. A subsidiary company (also known as the child company) is owned and controlled by either a parent company or a holding company. There is an operational difference between a parent company and a holding company. Holding companies do not have any operations of their own; they own a controlling share of stock or own the assets of the subsidiary company. Parent companies run their own operations and own other subsidiary companies. A subsidiary company operates as a normal company, while the parent company may choose to provide oversight only or become hands-on in the operations of the subsidiary company (Murray, 2018).

Foreign Subsidiaries

A foreign subsidiary is a company, whether partially or wholly-owned, that is part of a larger corporation with headquarters in a different country (“Foreign Subsidiary Company”, n.d.). A foreign subsidiary company is incorporated and follows the laws of the country in which it is located. There are some main advantages to foreign subsidiaries, a couple of them being, the parent or holding company has an international presence and the foreign subsidiary, being a separate legal entity, has limited liability (Howard, 2017).

It is worth noting that host-country nationals and expatriates (also known as parent-nationals) are typically subject to the employment laws of the country in which they work. For example, an Indian manufacturer who employs an Indian citizen at a plant located in the United States is still subject to U.S. EEO laws. Companies are also typically required to pay payroll taxes to the country where the work is being performed (U.S. Equal Employment Opportunity Commission [EEOC], 2003).

Before choosing any form of business entity, it is necessary to understand how it is structured, and whether it will bring more benefits than losses to your business.

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When someone makes the decision to start a business, deciding what type of business entity to choose is one of the most important decisions that will need to be made. Here are some of the most common types of business entities.

Sole Proprietorship

A sole proprietorship is the simplest business entity to set up. With Sole Proprietorship, there is only one owner (married couples that meet IRS requirements can qualify). There are no forms to fill out or registrations required with the state, although a local business license, permit, or assumed name (“dba”) certificate may be required. Because in a sole proprietorship one person is the sole owner, there is no need to file a separate tax return but the owner is required to file a schedule C with their individual tax return. The owner is responsible for paying their own self-employment taxes, which includes the employers’ share of Social Security and Medicare contributions. Despite the minimal requirements, sole proprietors are held personally liable for debts, obligations, and lawsuits among other business-like requirements. They are also not permitted to sell interest in the business. Since the business is reported on the owner’s personal tax return, deduction expenses such as medical insurance are restricted to the caps and restrictions for an individual (“Sole Proprietorships”, 2018) (“How Structure Affects”, n.d.)

Partnership

A partnership is a business entity that is owned by two or more people. Types of partnerships include general partnerships (GP), limited liability partnerships (LLP), and limited partnerships (LP). A general partnership is an agreement in which the partners share in all the assets and profits as well as the financial and legal liabilities of the business. From a tax standpoint, a general partnership serves as a pass-through entity. This means that a general partnership must file an annual information return with the IRS but is not subject to federal income tax. Each partner is required to include any income gained or lost on their individual tax returns according to ownership proportion or the partnership agreement. Because the partners are not considered employees, they are not issued a W-2 at the end of the year. Also, because partners in a general partnership are personally and jointly liable for the obligations of the partnership, creditors can seek the personal assets of the partners to satisfy claims against the business.

A limited liability partnership is similar to a general partnership; however, an LLP protects a business partner from liabilities and obligations that may result from the malpractice, wrongful acts, negligence, omissions, or misconduct of other the partner(s). This means that each partner’s liability is largely limited to their own actions. This type of business structure is often used by professionals such as lawyers, accountants, and doctors; and registration with the State is often required before the business is recognized as an LLP. Just like a general partnership, an LLP is treated as a pass-through entity for tax purposes. Any income gained or lost that are filed on the individual tax returns of the partners according to ownership proportion or the partnership agreement (“How Structure Affects”, n.d.) (“Partnerships”, 2018).

“C” Corporation

A C-corporation or (C-corp), often simply called a corporation, is a business entity that is taxed separately from its owners and subject to corporate income tax. Profits are also taxed to the shareholder when distributed as dividends. A C-corporation is owned by shareholders who elect a board of directors to make business decisions and oversee organizational policies. A C-corporation, in most cases, is required to report its financial operations to the state attorney general. Because a C corporation is considered an independent entity, it does not cease to exist even after its shareholders or owners change.

C corporations provide multiple advantages. Because a C corporation is a separate legal entity, the owners have limited liability with respect to the business’s debts. However, in rare instances, an owner can be personally sued if they are found to be liable for the corporation’s actions or debts. Other advantages of C corporations are the clear distinction between personal and corporate assets, freely transferable shares of stock, the ability to have an unlimited number of stockholders, different classes of stocks, and favorable tax treatment on certain expenses. The disadvantages of C corporations include double taxation, increased administrative expenses and compliance formalities, such as the board of directors and shareholder meetings (“How Structure Affects”, n.d.) (“Forming a Corporation”, 2018).

“S” Corporation

An S corporation, also known as an S Subchapter, is a type of corporation that operates like a C-corporation but is subject to taxation like a partnership. This type of corporation passes on the corporate income, losses, credits, and deductions to shareholders for federal tax purposes. The shareholders report the flow-through of income and losses on their individual tax returns and these are assessed based on their individual tax rates. This makes it possible for S corporations to avoid double taxation on corporate income. For a business to qualify as an S corporation, there are IRS requirements that must be met: a corporation must be domiciled in the U.S., have no more than 100 shareholders, and have only one class of stock. The type of shareholders is also limited to individuals, certain trusts, and estates. Corporations, partnerships, or non-resident alien shareholders are prohibited from owning stock in an S corporation (“How Structure Affects”, n.d.) (“S Corporations”, 2018).

Limited Liability Company (LLC)

LLC is another common form of a business entity. This is a hybrid entity that combines some characteristics of a C corporation with those of a partnership or sole proprietorship. However, depending on the elections an LLC makes, it can be treated like a corporation, partnership, or a “disregarded entity” for tax purposes. An LLC can be arranged in ways that allow for added flexibility. For example, there are no restrictions on who can own an LLC; an LLC can be owned by an LLC, an individual, corporations, or foreign entities. There are also no limits on the number of owners, called members, that an LLC can have. LLCs are required to create a legal document called an Operating Agreement that establishes the guidelines that govern the operation of the company. This agreement is usually requested by banks, mortgage companies, and other institutions when applying for a loan or setting up an account. The agreement also includes provisions related to the management of the LLC and its equity structure, which can be structured like a partnership or corporation. There are a few advantages to setting up an LLC such as limited liability for the members and pass-through taxation that avoids double taxation. A few disadvantages are: an LLC ceases to exist when a member leaves the LLC and the fees to set up an LLC can be expensive (“How Structure Affects”, n.d.) (“Limited Liability Company”, 2018).