Running a business involves many stages of making game-changing decisions. One such decision is deciding what type of business framework you choose to adopt. In the previous article, we looked at three business frameworks: Corporation, Sole Proprietorship, and Partnership firms. In this article, let’s explore Limited Liability Company, Co-op, and Franchises.
Limited Liability Company (LLC)
An LLC is a business framework in the United States that contains the best of sole proprietorship, corporation, and partnership business structures. LLCs allow multiple people to own and manage the business. It provides business owners with the advantage to separate their personal assets and business liabilities. The business owners have “limited liability” in case of any business debts. Only the amount they invest is at stake while their personal assets are protected.
Unlike Corporations, no double taxation applies to shareholders in an LLC. Additionally, an LLC is easy to set up (ease in registration, setting up business accounts, etc) and there’s not a need for a lot of continual maintenance in the form of documentation and paperwork. Moreover, it’s easy to add new partners and there is no limit to the number of owners in an LLC.
LLCs are independent legal structures separate from their owners. A separate legal entity basically means that an LLC can do business, open a bank account, and get a tax identification number.
Policies for LLCs in the United states differ from state to state. Some states charge extra fees for operating an LLC, do not allow professional groups (i.e., doctors or dentists) to operate through an LLC, while some reduce asset protection for single member LLCs.
Co-ops are businesses that are owned and run by their members, who can be customers, employees, or groups of businesses. All members have equal voting rights regardless of their level of involvement or investment. All members are expected to help run the cooperative. They are run on the principle of shared ownership, shared voice and shared profits. The profits are generally distributed among the members, also known as user-owners.
Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote. The various advantages of a Co-op include:
- Less Taxation. members of a cooperative are only taxed once on their income from the cooperative and not on both the individual and the cooperative level.
- Funding Opportunities. Depending on the type of cooperative you own or participate in, there are a variety of government-sponsored grant programs to help you start.
- Perpetual Existence. A cooperative structure brings less disruption and more continuity to the business. Unlike other business structures, members in a cooperative can routinely join or leave the business without causing dissolution.
Downsides of Co-operatives generally involve members having lesser operational control on the business. As mentioned earlier, co-ops are managed by all stakeholders in the business so business owners don’t have a significant say in business decisions.
According to investopedia.com, a franchise is a type of license that grants a franchisee access to a franchisor’s proprietary business knowledge, processes and trademarks, thus allowing the franchisee to sell a product or service under the franchisor’s business name. In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees.
Opening a franchise is often a strategy of business owners to expand business to different geographical locations and to up their market shares. It also a strategy for entrepreneurs to start in a business in competitive domains such as healthcare or retail. A significant advantage for such entrepreneurs is that they don’t need to go through the initial setting up process of a business rather they can leverage the already established business and brand name of the franchisor.
A major trade-off of running a franchise, however, is that the franchisor dictates the franchisee in the way he should run the business. Restrictions like where and how to operate the business, partnership deals to accept or decline, choice of buyers and suppliers, etc are imposed on entrepreneurs running a franchise. Moreover, entrepreneurs earn only part of the profits that the franchise earns.
Franchising is seen by many as a simple way to go into business for the first time. But franchising is no guarantee of success and the same principles of good management—such as informed decision-making, hard work, time management, having enough money and serving your customers well—still apply.-business.qld.gov.au
- legalzoom.com- “Definition of a Limited Liability Company or LLC”
- incorporate.com- “Business Entity Types”
- Entrepreneurship course notes