You’ll have to choose a legal structure for your business before you can make your idea a reality.
It is not just a matter of administrative convenience. The structure of a company can affect your daily operations and even corporate and personal tax rates.
Your financial responsibility for business debts will be affected by the type of business that you register. Your business type will also affect your options if you are looking for funding or investment.
Learn about the ten different types of business structure available to your small business and how to choose the right one for you.
There are 10 different types of business structures
- Sole proprietorship
- General Partnership
- Limited partnership
- Limited Liability Partnership (LLP)
- C Corporation
- S Corporation
- Benefit corporation
- Limited Liability Company (LLC)
- Nonprofit
- Joint Venture
Your business structure will depend on many factors, including whether you want to act alone or with partners, the amount of personal liability that you’re willing to accept, if you need to issue share, and what licenses you require, as well as insurance.
1. Sole proprietorship
A sole ownership refers to a business that is not incorporated and owned by one individual. The main benefit of a sole proprietorship lies in its simplicity. It is the default designation for any business selling products or services themselves.
The sole proprietors also have full control over their businesses and can enjoy a single taxation round on their personal income.
The ease of establishing a sole proprietorship has a dual-edged blade. The owners of this business are the least protected, as sole proprietors have full responsibility for their company’s financial and legal status.
If your business is in a bad financial situation, you may have to use your personal assets to pay off business debts.
2. General Partnership (GP)
General Partnerships is the default business partnership.
General partnerships, like sole proprietorships are taxed at their partners’ individual income levels. General partners also have equal participation in the company, which means everyone has an equal say.
General partnerships have some of the disadvantages that sole proprietorships do. There is no distinction in law between general partners and the partnership, so all owners can be held liable for any debts or damages the company may incur.
General partners are responsible for all business decisions made by their co-founders. Creditors or lawsuits can also reach the personal assets of partners.
3. Limited Partnership (LP)
Limited partnerships are also owned by more than two people and benefit from pass-through taxes. The main difference is that LPs are owned by two or more people and enjoy pass-through taxation.
A limited partnership can have the disadvantage of not allowing limited partners to be involved in the daily running of the business. It can be frustrating, especially if you are concerned about your personal liability and have suggestions on how to better run the firm.
4. Limited Liability Partnership (LLP)
The last type of partnership is LLPs. These are owned by at least two partners and benefit from pass-through taxes. Partners in an LLP can be held personally liable only for their own actions. They are not liable, however, for the actions of other partners.
LLP structures provide additional separation between company and personal assets. LLP status, however, is not available for all businesses. It’s only available to licensed professionals, such as those in law and accounting.
5. C Corporation
C Corporations or C Corps are the most popular type of corporation and ideal for large companies. C corporations are legal entities that are completely separate from their owners. This offers the best protection against personal liability.
A C corporation can be a good choice for small businesses because it is relatively easy to raise money. C corporations can be funded through the issuance of shares. You can offer as many shares and types of stock as you want.
C Corps have a disadvantage compared to some other business types. Each C Corp requires a complex filing and registration procedure, and oversight through the creation of bylaws and the appointment of a Board of Directors.
The main disadvantage of forming C Corps is that they do not have the pass-through status. This means that C corporations are taxed twice, once on their corporate income and then again on the income of shareholders and owners.
6. S corporation
S corporations or S Corps, avoid the double taxation problem that C corp face. S corporations are pass-through entities like partnerships. This means that they pay corporate income tax only once at the personal income level of their owners and shareholders.
This advantage is negated by the strict requirements to maintain S Corp status. S corporations, for example, can only offer common stock to 100 shareholders. These shareholders must also be citizens or permanent residents in the United States.
7. Benefit corporation
A benefit corporations (also called B Corps) is a type of for profit corporation recognized by the majority of US states. Benefit corporations are taxed in the same manner as C-corporations, but they place an emphasis on having a positive effect on the local community and the environment.
A benefit corporation is subject to the same rules as C corporations. A benefit corporation is also required to publish an annual report that assesses its environmental and social performance. This shows its commitment towards a higher purpose.
8. Limited Liability Company (LLC)
Limited Liability Companies combine many of the characteristics of an ordinary partnership with those of traditional corporate legal entities. Limited liability companies are separate legal entities that protect their owners from any personal liability for debts or damages incurred by the business.
Tax flexibility is another advantage to forming a small business as Limited Liability Company. Tax flexibility is another advantage of forming your small business as a limited liability company.
It is more difficult to register a Limited Liability Company than a sole proprietorship. An LLC, for example, must file and write articles of incorporation and appoint an agent.
9. Nonprofit
A nonprofit business is one that has received tax-exempt status from the IRS because it promotes a cause that benefits the public. Nonprofit is a term that refers to the tax status of a company, since most nonprofits are corporations.
Forming your small business as an organization has a major tax advantage: If your organization qualifies under the Internal Revenue Code as a tax-exempt organization, you won’t be required to pay federal income taxes.
Nonprofits have a limited range of business activities and must reinvest their profits.
10. Joint Venture
Joint ventures are a form of partnership between two or more different business entities. These types of business agreements involve firms pooling resources to achieve a particular task, often on a temporary or short-term basis.
Joint ventures can be formed by businesses to secure a contract, buy real estate or to respond to industry regulations.
Joint ventures are a great business structure because they let participants benefit from other firms’ resources without losing their independence. The biggest disadvantage is that all costs and losses are shared by each joint venture participant.
