Business Structure Types | What Makes Sense for Your Company

Are you interested in forming a company? That’s awesome! Entrepreneurship is a rewarding path with a bounty of exciting, unique opportunities for business owners. In the beginning stage of creating a business, you’ll want to explore which business structure makes the most sense for you. Serious consideration ought to be given to business structure, because that’s the foundation for your entrepreneurial future! What are the types of business structures? The main four types are: 

• Sole Proprietorship 
• Limited Liability Company (LLC) 
• Partnership
• Corporation 

Sole Proprietorship | A Popular Business Structure for New Companies

As you may be able to glean from the words this business type is comprised of, a sole proprietorship is a company owned by strictly one person. This unincorporated business structure is the simplest of the four. As such, it doesn’t offer a whole lot of legal or financial protection to the company owner. And why’s that? Well, a sole proprietorship doesn’t include the creation of a distinct, separate legal identity. Which is to say, the owner is the business, and the business is the owner – they have the same identity. What this means is, with a sole proprietorship the owner is responsible for 100% of the liability of the business. 

Why would anyone want to have a sole proprietorship, given the liability? The attraction of this business type appeals to anyone who wants absolute control of their company. Not to mention, it’s the least expensive and simple to establish. On top of that, a sole proprietorship has tax benefits – namely, the owner’s personal income is the same as the business income. With this structure, income is taxed once and only once. Another attractive aspect is that there aren’t many regulatory requirements. 

Limited Liability Company (LLC) 

Lots of business owners want to form Limited Liability Companies (LLCs) because the structure provides lots of flexibility. In terms of tax benefits, an LLC shares similarities with sole proprietorships with one major difference. An LLC (if not a C-corporation) is known as a “pass-through” or “flow-through” business entity. Like a sole proprietorship, you’ll only be taxed once. If you have a C corporation, the entity would be subject to corporate income tax or other entity-level taxes. Another appeal of an LLC is that the owner is not personally responsible for the liability of the business, including the debt and/or operation. The limited liability status of an LLC means the company is a separate and distinct legal entity. 

Partnership 

You guessed it! A partnership business structure refers to a business that is owned by two or more people. These owners are called partners. Like an LLC, partnerships have pass-through tax benefits – the owners’ incomes are taxed just once. If two or more owners are in a partnership, they are both/all responsible for the liability of the business. Although, there’s a bit of complexity on the liability front, because there isn’t just one type of partnership. 

With a general partnership, each partner participates in the business operation and they all have unlimited liability. What is unlimited liability? The personal assets of each partner may be used to repay the liability of the partnership. Similarly, it means each partner bears a responsibility for the actions of the other partner(s). If one partner is sued, the general partnership structure allows the other partner’s assets to be claimed in the lawsuit, as well. 

How about a limited partnership? In a limited partnership, there is one general partner. That person assumes unlimited liability for the entire partnership and handles the operations of the business. This business type also includes limited partners – those who assume an amount of liability equal to their financial interest in the company. Limited partners don’t participate in managerial decisions or have control of the business in a direct way. 

There’s also Limited Liability Partnerships (LLP). An LLP resembles a general partnership, in that more than one partner maintains responsibility for the company’s operations. What distinguishes an LLP? Partners aren’t held responsible in a personal way for the debts of the company or the other partners. There are limitations on what business can actually be an LLP – accountants and lawyers are where this business type is used most often. 

Corporation

A corporation is a distinct and separate legal entity that is created by several shareholders. When owners incorporate a business, they protect themselves from personal liability in terms of debt and/or legal issues. This is one of the more complicated business types. For a corporation, articles of incorporation have to be drawn up, which specify information like the amount of shares issued, the company location and name, and the company’s purpose. 

If an owner of a corporation were to die, that corporation will continue to exist as a legal entity. That’s not the case with partnerships and sole proprietorships – if an owner declares bankruptcy or dies, the company gets dissolved. 

And, corporations are usually broken down into three types: 

• C-Corporation
  • The most common type of incorporation, a C-corporation is taxed as a separate business entity and owners who receive profit from the business are also taxed on an individual basis. 
• S-Corporation
  • An S-corporation has much in common with a C-corporation, but can only have a maximum of 100 shareholders. With this business type, profits are not taxed twice because it is a pass-through entity. 
• Non-Profit Corporation
  • Primarily seen in use by charity organizations, non-profits are completely tax exempt. The total amount of cash flow that goes through the business is used for operations now or in the future. 

Many business start out as sole proprietorships because that can be very sensible for small, new companies. As businesses expand and gain momentum, they frequently switch their structure to a corporation. It all depends on your specific business!

Want to start or grow your business today? Our team can walk you through all the different types of business structures as well as the process of legal entity formation. Contact Stockman & Poropat, PLLC for a free consultation!