Types of Business Structures

Are you wondering what type of business structure you should be opting for? Well, you can either choose to be a sole proprietor, a partner, or establish a corporation. 

Choosing the right type of business structure may be daunting and complicated. You can simplify this task by understanding the different types of business structures.

Read on to understand the different types of business structures. You’ll also learn about the factors to consider when choosing a business structure!

Here’s What We’ll Cover:

Different Types of Business Structures

Factors to Consider When Choosing Your Business Structure

Do I Need a Business License?

Key Takeaways

Different Types of Business Structures

The type of business structure you opt for affects all areas of your business. This includes from day-to-day operations to tax payments to investment options.

Tax rates for small businesses generally depend on their structure. They either face the personal income tax rate (or lower) or business and personal income tax rates. There are different ways to structure a business, depending upon its size and needs. To help you decide which one is right for your business, read on.

Sole Proprietorship

The most common type of business structure is the sole proprietorship. One individual, called a sole proprietor, usually owns and operates this business. They engage in a business activity without any formal organization, making it the simplest form of ownership.

Sole proprietorships do not create an independent legal entity for their owners. Assets and liabilities aren’t two different things; they’re two sides of one coin. Sole proprietors claim both business expenses and personal income on their personal tax returns.

If you choose this structure, only you will be responsible if things go wrong. You’re at risk of losing personal assets if your company goes bankrupt. This structure is right for you if you’re looking for full ownership of your company.

Partnerships

Partnerships are businesses owned and operated by two or more individuals. They could be either general partnerships or limited partnerships.

General Partnership

In most cases, a general partnership has at least two partners. In general partnerships, the partners associate to carry on business for profit. To manage the business, they work together, assume responsibility for debts, and share profits and losses.

For this business structure, you need to enter into an agreement with your partner. The agreement needs to outline each partner’s duties and responsibilities. 

Profits from general partnership activities are taxed at the individual tax rate for each partner.

Limited Partnership

Limited liability partnerships usually consist of two parties. It has general partners who own the business and limited partners who invest in the company. To open a Limited Partnership (LP), you must first create an LP agreement between yourself and another person. One must be the investor, and the other must be the general partner.

Partnership agreements imply that partners with limited liability also have limited control. This refers specifically to control over the business. General partners own and operate the business and assume the business’s liabilities. General partners are responsible and in control of the business. Limited partners own the company but do not assume its risks.

Corporation

Corporations are considered independent legal entities — a C Corp being separate from its owners. 

Corporations offer the strongest protection from personal liability. Corporations are more complicated than other business structures. For businesses planning to expand and add shareholders, a corporate structure is a good option.

Corporations need a great deal of recordkeeping and reporting. They are subject to more regulations and taxes. A corporation’s net income is taxed once on the corporate level at 21%.

Corporations are subject to double taxation, occurring when you pay income taxes twice on the same source of income. A corporation is taxed as a business entity, and each shareholder’s income is taxed as well.

S Corporations

S corporations are a type of corporation where profits and losses pass through directly to the owner’s income. This means that these factors are not subject to corporate tax rates.

Only the owners or shareholders are subject to taxation. If you elect to operate as an S Corp through the IRS, you will avoid double taxation.

B Corporations

In most U.S. states, benefit corporations, or B corporations, are recognized as for-profit corporations. A B Corp differs from a C corp in purpose, accountability, and transparency, but not taxation.

They are driven by both profit and mission. Additionally, the company is held accountable for producing both a financial profit and a public benefit. A few states require B corps to submit benefit reports detailing their contributions to the public good.

In states where the B Corp status is available, a company does not need to obtain a third-party certification to be considered a B corporation.

Close Corporation

The corporate structure of Close Corporations resembles that of B corporations. Still, it is less traditional. Close corporations omit many formalities typically associated with corporations. They’re treated more like a smaller company.

The rules vary from state to state, but shares are usually not publicly traded. Close corporations can be run by a small group of shareholders without a board of directors.  

Nonprofit Corporation

These corporations are organized to do charity, education, religious, literary, or scientific work. Nonprofit organizations receive tax-exempt status because of their benefits to society. This means that any profit they make is not subject to state or federal taxes. Still, they must file with the IRS to get tax exemption.

Administrative rules for nonprofit corporations are very similar to those for C corporations. Additionally, they must follow specific rules on what they do with the profits. 

Limited Liability Company

A Limited Liability Company (LLC) allows you to combine the benefits of several structures. This includes the sole proprietorship, corporation, and partnership business structures. An LLC differs from other business forms in that owners are not liable for the business’s debts.

An LLC is a flexible business structure. Business and personal liability in an LLC are separated. All owners of the business share tax obligations.

A member of an LLC pays FICA taxes, as well as federal and state income taxes, which are higher than the 15% corporate tax rate.

The liability protection is comparable to that of a corporation, without double taxation. Since taxation is passed through to individual income, your business is not subject to double corporate taxation. Avoiding fines is easy if you are aware of tax deadline dates.

Limited liability companies have a limited life in many states. Depending on your state, you may be required to dissolve or reform your LLC if someone joins or leaves. LLCs are taxable differently in different states, so the burden of taxes varies. You should check with your state for details.

Form an LLC if you expect to earn financial benefits. A formal legal structure must be in place to protect your personal assets if there is any potential risk associated with your business.

Factors to Consider When Choosing Your Business Structure

It is important to choose the most beneficial structure for your small business. Take into account the following factors when choosing your business structure type:

• Legal liability
• Taxes
• Cost
• Flexibility
• The future needs of your business

Do I Need a Business License?

Whether big or small, every business owner needs to be granted the right to operate legally, regardless of the field you are operating in. All levels of government issue business licenses. Depending on what type of business you plan to start, you may need to obtain a business license. Some of these licenses are local, county, state, or federal, depending on where you practice business.

Having a business license protects you and your business from losing personal assets in the event of a lawsuit. It protects if your business is damaged or if any of your employees suffer from an injury. 

You are responsible for your assets and personal finances if you do not have a business license. Register your business after deciding its structure. You might consider contacting a business lawyer or someone who can provide legal advice based on your specific situation. 

Key Takeaways

When it comes to running a business, structure is everything. Being able to choose the right structure for your business can make a huge difference. For the most part, structure depends on your business’s size, as well as its operations. Be sure to pick the right structure, and get any business licenses that you may need.

Are you looking for more articles like this? Check out our resource hub! It has plenty of helpful information for you and your small business.

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