One of the most important steps to consider when starting a business is deciding which type of business structure you will use. This decision is important because it will impact several facets of your business including taxes and personal liability. Which structure the business owner chooses will depend on a number of factors, and each type has its own advantages and disadvantages that make it prudent for some businesses but not for others. Here we will take a look at some of the most common types of business structures so you can decide which is right for you and your business.
Five Common Types of Business Structures
Below are five of the most common types of business structures, along with a short explanation and the main advantages for each type:
- Sole proprietorship
- S Corporation
- Limited liability company
1. Sole Proprietorship
In a sole proprietorship structure, one person owns the business and runs the operations. Its main advantage is its simplicity, as it’s the easiest to set up. In addition to being the easiest to set up, it is also the least expensive. This type of business structure is ideal for people who plan to work alone and works well for at-home, low-risk businesses.
In a partnership, two or more people own and operate the business together. There are different types of partnerships, including general partnerships and limited partnerships. In a general partnership, both partners hold an equal role in owning and operating the business which means both are equally responsible and liable for debts and other financial obligations. In a limited partnership, the limited partners have limited control and no liability. Partnerships are the simplest form of business structure for multi-owner companies.
A business corporation is a structure in which the company is considered a separate legal entity that is independent of its owners. It is ideal for medium-high risk companies that either need to raise capital or have plans to go public with the company. It is the most complex and expensive business structure, and has to comply with more regulations and tax requirements than other structures.
4. S Corporation
S corporations have the liability protection of corporations along with added tax benefits. This makes them better suited to smaller companies. However, the company must meet certain IRS criteria in order to be listed as an S Corporation. It has two limitations: it cannot have more than 100 shareholders, and all shareholders must be US citizens. They can also only sell common stock, which allows shareholders to elect their own board of directors.
5. Limited Liability Company (LLC)
A limited liability company or LLC, is a combination of partnerships and corporations. They are distinct legal entities from business ownership, meaning owners are protected from personal liability for any debts. Another benefit of LLC’s is the tax flexibility. They can choose to be taxed as either a corporation or as a pass-through entity like a sole proprietorship or S corporation. The downside is that you must file special paperwork with the secretary of state in which your business will be held in order to set up an LLC.
Determining which business structure is right for your small business is one of the most important decisions you will have to make as a business owner. You will need to consider a number of factors as well as the advantages and disadvantages of each structure before making your selection.