img

Types of Business Structures: A Quick Guide

Starting a business in the United States is relatively simple — the World Bank confirms this with a 91.6 out of 100 ranking for ease of forming an enterprise. However, knowing how to choose a business structure requires significantly more effort.

The business model you choose will determine your taxes, liability and growth potential, making it paramount that you make the right decision. Our guide will help you understand the primary business types, empowering you to choose a structure that allows for long-term success.

Help Me Choose
LLC

Most Popular

Corp Nonprofit Sole Proprietor General Partnership
  GET STARTED GET STARTED GET STARTED GET STARTED GET STARTED
Personal Asset Protection
Liability Members have little -no personal liability Shareholders, directors and officers have little-no personal liability Directors and officers have little-no personal liability Individual has unlimited liability Partners take on unlimited liability
Number of owners 1 - 100 only limited by shares Generally not considered "owned" but controlled 1 2+
Reporting requirements Varies by state, Generally renews annually Varies by state, Generally renews annually Varies by state, Generally renews annually Varies by state, Trade name generally renews annually Varies by state, Generally renews annually
Operation Versatile Shareholders elect board members who appoint officers who run day to day Board members appoint officers who run day to day Controlled by 1 individual Controlled by partners
Taxation Versatile, generally pass through initially C-corp/S-corp Not taxed Pass through Semi Pass through (assigned income)
  GET STARTED GET STARTED GET STARTED GET STARTED GET STARTED
GET STARTED

LLC


Personal Asset Protection

Liability

Members have little -no personal liability

Number of Owners

1 - 100

Reporting Requirements

Varies by state, Generally renews annually

Operation

Versatile

Taxation

Versatile, generally pass though initially

GET STARTED

Corp


Personal Asset Protection

Liability

Shareholders, directors and officers have little-no personal liability

Number of owners

only limited by shares

Reporting requirements

Varies by state, Generally renews annually

Operation

Shareholders elect board members who appoint officers who run day to day

Taxation

C-corp/S-corp

GET STARTED

Nonprofit


Personal Asset Protection

Liability

Directors and officers have little-no personal liability

Number of owners

Generally not considered "owned" but controlled

Reporting requirements

Varies by state, Generally renews annually

Operation

Board members appoint officers who run day to day

Taxation

Not taxed

GET STARTED

Sole Proprietor


Liability

Individual has unlimited liability

Number of owners

1

Reporting requirements

Varies by state, Trade name generally renews annually

Operation

Controlled by 1 individual

Taxation

Pass through

GET STARTED

General Partnership


Liability

Partners take on unlimited liability

Number of owners

2+

Reporting requirements

Varies by state, Generally renews annually

Operation

Controlled by partners

Taxation

Semi Pass through (assigned income)

What Is a Business Structure?

A business structure is the legal framework of your enterprise. Before you start trading, you'll need to decide which business structure fits your needs. Your decision should consider factors such as the number of founders, the level of protection you need, and whether or not you'd like to sell stocks on public exchanges.

Types of Business Structures

A sole proprietorship is a business structure that allows for one owner. This comes with the perks of having complete control of your business operations. However, you do carry the risk of unlimited personal liability. As your personal and business assets and liabilities are combined, you'll submit one individual income tax return.

Sole proprietorships are the Ideal structures for startups that want to test the waters before formalizing their business. However, banks are less likely to provide business loans for these business types, making it more challenging to acquire capital.

This business entity offers a simple solution for startups comprising two or more people. There are three main types of partnerships:

General partnership: All partners have an equal say in business operations and are equally liable.

Limited partnership: This business structure appoints one partner to carry unlimited liability while the others will have partial liability. The main partner will also hold the most control in the business.

Limited liability partnership: As the name suggests, all partners will have limited liability and will not be held responsible for company debt.

A partnership is a good choice for professional groups — such as doctors operating under one practice — as they can share control and profits.

A Limited Liability Company (LLC) offers maximum flexibility with no cap on the number of members involved. You are also free to determine each member's responsibility and profit share.

LLCs are a popular option for small businesses, as members have little to no liability while also paying less in taxes than corporations. However, the initial costs of starting an LLC are significantly higher than other structures.

A corporation is independent from its shareholders, enabling owners to leave and join without implications. Corporations fall into two categories — C corporations and S corporations.

C corporations offer no limits on the number of shareholders and have the highest level of protection against personal liability. However, members are taxed twice — once on the company profits and again on shareholder dividends.

In contrast, S corporations have a 100-member limit, and all shareholders are responsible for submitting taxes individually. This structure allows for the same level of protection against personal liability without double taxation.

If an organization benefits the public — such as a charity, school, church or scientific research center — it can be classified as a nonprofit organization. In registering this business structure, members will need to file the necessary IRS paperwork for tax-exempt status. Nonprofit organizations and C corporations have similar regulations, but the former has more limitations in how members distribute earnings.

A cooperative is founded and managed by those using its services. For example, an agricultural cooperative will consist of multiple farmers who band together to trade in larger markets or qualify for discounts.

Purchasing shares qualifies you to become a cooperative member, yet your share percentage has no bearing on your influence in the entity.

img

What Business Structure Should I Choose?

When selecting a business structure, consider the following aspects in your decision:

  • Company size: The number of members may guide your business structure decision. For example, you can only qualify as a sole proprietorship if there is one owner.
  • Budget: New startups may face challenges in acquiring capital, rendering some business structures unaffordable. In addition, you may have to hire staff to handle increasing paperwork needs, especially if you're registering as a corporation.
  • Level of risk: Determining the level of liability you can take on will help you narrow down your selection.
  • Long-term goals: Establishing your objectives for the future is another important consideration in choosing a business structure. If you plan to incentivize employees by offering them stock, you will need to select a structure that allows for this.
Consulting with knowledgeable professionals will help you gain more insight into how these factors influence your business. The advice you receive will assist you in choosing a structure that fulfills your current needs and allows for long-term growth.



Transitioning Between Business Structures

Some entrepreneurs prefer to start with a simpler business structure like a sole proprietorship or partnership and transition to a more formal model later. Making this change is often necessary to enable owners to scale their businesses more effectively.

It's advisable to seek advice from trusted experts to ensure your new structure meets your business goals. You'll also need to consider the different taxation policies and how this will impact your bottom line. If you decide that transitioning to a new structure is in your best interest, there are a few compliance regulations to consider. For example, you'll need to complete a Doing Business As (DBA) form, apply for a new employee identification number (EIN) and register your entity with your state.

img

Sole proprietorships, partnerships, LLCs, corporations, nonprofit organizations and cooperatives each have their advantages and disadvantages. Consider these characteristics carefully when choosing a business structure to support your goals.

The team at Firstep Business Solutions makes it our mission to help you launch your startup with ease. We'll aid you in deciding which business structure is best for your needs, allowing you to maximize your growth in the future. Our team will also assist with completing and submitting the necessary paperwork so you can focus on what matters most — growing your enterprise! Learn more about our services on our website or contact our team today for personalized support.