Choosing A Business Structure

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.