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Types of Business Structures

Lesson 3 from: Business 101: Start-up Considerations

Karen Okonkwo

Types of Business Structures

Lesson 3 from: Business 101: Start-up Considerations

Karen Okonkwo

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Lesson Info

3. Types of Business Structures

Lesson Info

Types of Business Structures

Next, here, are types of business structures. I know that this is something that is really a hot topic for a lot of people and quite frankly, I would never claim that I am an expert at it. It was one of the things that took me the longest when I first started with business because I literally had no idea that there were eight different business structures. There's probably more but I know the eight of them. It really just comes down to level of liability. That's really what I've determined is level of liability and responsibility. So, whether you are a creative or you are an accountant or a lawyer, it's just really whatever is best for you. So, I'm gonna go through just reading off the eight different business structures. As, you're hearing me describing each of them, ask yourself what is the most optimal for you as your own type of business structure. So, the first one here is a Sole Proprietorship. Sole Proprietorship is one individual or a married couple in business alone. Sole Prop...

rietorship is the most common business form. This type of business is simple to form and operate. You can enjoy greater flexibility of management, fewer legal controls and fewer taxes. However, the thing about being a business owner here, in this particular set-up is that the responsibility falls on you. So the liability is on you. All debts incurred. It all falls on you. And when I say you, I'm saying business. A General Partnership. A General Partnership is composed of two or more people. They're usually not married. Who, basically, agree to contribute money and labor and their skill set to business. So, each partner will, basically, share the profits, the loses, the management of the company and they all, personally, have equal liability for the debts of the partnership as well. So, in this particular situation, formal terms of the partnership are usually contained in a written partnership agreement, which I encourage for all forms of business. And then a Limited Partnership. A Limited Partnership is composed of one or more general partners and then one or more limited partners. So how this differs is that the general partners basically manage the business. They share fully in the profits and loses. But, somebody who comes in as a limited partner, they'll share in the profits but they don't share in the loses. Its loses are limited to the extent of their investment. So whatever they put in, it's limited to that. Limited partners are usually not involved in the day to day operations of the business like I mentioned earlier. The next tier is a Limited Liability Partnership. So, an LLP. It's very similar to a general partnership except that normally a partner doesn't have personal liability for the negligence of another partner. So, you usually find a lot of accountants and lawyers who adopt this particular business model. And, it says here that you need to still file with the Secretary of State because some of these particular business set-ups, you don't need to file certain paperwork. So, they're being clear that you do need to file with the Secretary of State. A Limited Liability Limited Partnership. A Limited Liability Limited Partnership is a limited partnership that chooses to become an LLLP by including a statement to the effect in its certificate of limited partnership. So, this type of business structure shields certain general partners from liability and obligations to the LLLP. Corporation. A Corporation is a more complex business structure. A Corporation has certain rights, privileges, and liabilities beyond those of an individual. Doing business as a corporation may yield tax or financial benefits but these can be offset by other considerations such as increased licensing fees or decreased personal control. Corporations may be formed for profit or nonprofit. For businesses who are a corporation, sometimes you find that they have a lot of investors who are controlling the business. So, when it says you have decreased personal control, it just means that your business in not structured in such a way where you have a lot of say in it. So, as a creative, I don't typically encourage people to create a corporation but again it's dependent on what's best for you. A Nonprofit Corporation. It's a legal entity. It's typically run to further an ideal or a goal rather than an interest of profit. Many nonprofits actually serve the public interest but some engage in private sector activities. So, if your nonprofit organization plans to raise funds, they do require that you often times register under the charities program of the Secretary of State. And, charitable activities may require additional registration. And, for nonprofits, you do need to have a Board. That was something that was new for me a long time ago when I decided to start a nonprofit. I was like, oh, it's just a business and I was carrying on and I realized you have to file certain names and have meeting minutes and it's very intricate. It isn't just oh, it's a nonprofit. You have to put a lot of time and energy, of course, and have a team of people with you. A Limited Liability Company. A Limited Liability Company is formed by one or more individuals or entities through a special written agreement. Usually an operating agreement. The agreement details the organization of the LLC, including provisions for management, assignability of interest, and distribution of profits and loses. LLCs are permitted to engage in any lawful for profit business or activity other than banking or insurance. And, this is the type of business structure that I've chosen for my businesses. It does pass the liability down to the individual not on the business. And so, it just has made it a little more clean in doing my partnerships. So again, it all depends on what's best for you and your company. I have a question to find out your thoughts about pricing versus value. okay. For example, I shoot for a stock agency called Stocksy. For me, it's kind of a hobby but Stocksy is not competing with Shutterstock or Get It because it's offering higher pricing, right. Okay. So, if you were to survey clients who are looking for cheaper images, they might say Stocksy's pricing might be too expensive but because of creative content, diverse content like Turnal, it offers higher value. So, potential clients might not be aware of the value until they actually experience the product of the service. How do you survey your potential ideal clients and let them know the value before you even launch the product or service? So, before you actually launch, how do you determine the price point? With the added value you will bring to the marketplace compared to the other players in the marketplace. Yeah, well you have to differentiate yourself because for us, what we decided to do is we decided to think when we did a survey, we didn't just ask them about price point. We wanted to get a full well-rounded understanding of the customer. From their ethnic background, to the level of challenges they've had finding diverse stock photography, to what type of consumer they are. Are they a personal use user? Are they representing a company? So, these were questions that we asked and in doing that, we were able to uncover okay, the majority of our customers are kind of 50-50. They either represent a company or it's personal use. So, in knowing that, I know that I need to make sure that my price points are accessible for that type of user. So, that's what we did. We, basically, decided on three different payment structures for subscriptions and then one price just for al la cart. And, what we've done is we've passed one year and we decided, let's ask our customers now. Now that you've seen our products. Now that you've used it, are you still willing to spend this much? We actually said, would you pay... I can't remember what were the different values but we just basically said, would you be willing to pay more or less? Is it neutral? And, everyone said that they're getting above what they were ever thinking they would get for those images. So, that tells us, okay, we can increase our prices. So coming soon to everyone, we'll be increasing our prices. (laughing) So, yeah, that's what you wanna to do. You want to get a really well rounded understanding of the customer beyond just what do they think about price. Let me look at them and let me actually figure out, okay, you are a personal use user. You're a start-up. You don't have the money to be spending thousands of dollars. So, let's think of what would make sense and what's fair and what's accessible. So, that's what we did.

Class Materials

Bonus Materials with Purchase

Startup Considerations Worksheet