What are the major types of businesses in the private-sector and how do they differ from one another?
A broad variety of different businesses, company structures, and industries exist within the private sector in the United States. The private sector is a broad concept encompassing profit-seeking companies that produce products and offer services, invest capital, and undertake a variety of different activities in pursuit of profit. These companies range in size from small businesses with the owner as the sole employee, to multinational corporations with millions of employees and contractors. The private sector represents the creative work of any employee or business owner making a profit or pursuing a profit.
Primarily, private sector activities may be divided into production and services. Companies that produce products do so with the intent of selling these products at a profit to organizations or individuals. The companies that do not produce products themselves likely offer services for sale with the intent of making profits for their efforts.
- In the United States, the private sector is made up of a variety of profit-seeking businesses providing products and services.
- Sole proprietors are small businesses owned by one individual who is responsible for all debts and liabilities the business incurs.
- Partnerships have multiple owners who divide the responsibilities, profits, and obligations according to an agreement among the partners.
- Limited liability companies (LLCs) and corporations protect owner assets from liability by creating a unique entity without direct ties to individuals.
Private sector businesses are organized in different ways to provide tax benefits to the owners, minimize liability, and improve operational efficiency. The most common organizational structures are sole proprietors, partnerships, limited liability companies, and corporations.
Sole proprietors are mostly small businesses and are the easiest way to organize a company in the U.S. These companies are owned by one individual and have a financial structure that essentially makes the owner and the company itself the same person for legal purposes.
Number of small businesses in the United States as of October 2020 according to the U.S. Small Business Administration.
The owner is completely responsible for all debts and liabilities the company assumes. Lenders may pursue payment from this individual if the company defaults on a loan and legal action may be taken against the owner directly for anything illegal the company does.
Partnerships are similar to sole proprietors but have multiple owners that divide the responsibilities and profits amongst themselves according to an arrangement among the partners. These terms pose a disadvantage to larger companies, which may be sued often and take on substantial loans and obligations as a normal part of daily business operations. For these reasons, larger companies usually decide to organize differently in order to protect the owners.
Limited Liability Companies (LLC) and Corporations
Limited liability companies (LLC) and corporations are common organizational structures that protect owner assets and address liability concerns by, in essence, creating the company as a unique entity without direct ties to individuals. This means all responsibility rests with the company itself for any event or occurrence within the course of normal business practice. These structures make it much more difficult to pursue the individual owners for payment of debts or for legal liability. These companies are taxed differently from sole proprietors and partnerships and have many important legal differences.
The Bottom Line
Under one of these organizational structures, most companies are governed by specific internal bylaws and policies set by the owners or governing board. Private companies are free to choose their own legal means of seeking profit, advertising their product or services, and conducting normal business activities with limited government involvement.