4 Main Types of Business Structures: Choosing the Right One for Your Business

Whether you’re a first-time small business owner or aiming to have many enterprises under your name, setting up a new venture is always an exciting moment. Still, don’t let the anticipation drive you away from taking care of the most critical decisions beforehand: particularly, choosing the best business structure.

So, why is this such a crucial step? Well, depending on the type of business you run, picking the proper structure determines how you’ll deal with taxes, legal matters and more. In this article, we’ll cover the four main business structures and help you determine which one is right for your business.

The Four Business Entity Types

While there are various types of business entities, these four are the most common. Chances are, you’ll fall into one of the following business structures.

1. Sole Proprietorship

Widely regarded as one of the most straightforward business entities to manage, a sole proprietorship is operated by a single owner who is personally liable for the debts and liabilities of the business.

Who is this entity for?

Sole proprietorship is the simplest business structure amongst the rest and is best used for individuals who just started their business, have a small operation or don’t want to invest heavily into the business quite yet. Many prominent names like Walmart and eBay have started as one of these entities before expansion.

What are the benefits?

• Simplicity: Running a business as a sole proprietorship means a notable reduction in paperwork and other business requirements that would otherwise complicate the process.
• Reduced Costs: Unlike LLC and Corporations, sole proprietorships do not have maintenance fees, and if so are usually fairly small. It also demands less professional assistance from accountants and attorneys as it is simple to start.
• Lower Tax: Compared to a corporation, sole proprietorship pays less in tax as it is a pass-through entity, and profits are not taxed at a business level. However, they are required to pay self-employment tax on any profits generated.

2. Partnership

As the name suggests, a partnership is operated by at least two individuals. The structure can be split into two different ways: a limited liability partnership (LLP), where each partner oversees separate business aspects, or a standard partnership with equal distribution. Generally, you can expect a partnership to be a bit more complicated than sole proprietorships, with most requiring an attorney to review legal structures and drafting partnership/operating agreements.

Who is this entity for?

Partnerships are for anyone who wants to run an operation along with another individual, whether it be a family member, friend or professional colleague. Like sole proprietorship, partnership is a low cost and commitment method of starting a business.

What are the benefits?

• Faster Growth: With two or more partners, your combined efforts could see increased growth. You’re also more likely to receive loans.
• Taxes: Partnership is a pass-through entity and therefore is not subject to business level tax.
• Quick Startup: Like sole proprietorships, you won’t have to deal with much paperwork when filing as a partnership compared to a Corporation.

3. Limited Liability Company (LLC)

Limited liability companies (LLCs) is one of the more complicated business structures available. Individuals who have interest in the business are called members. The main purpose of this structure is to provide members with limited liability protection of their personal assets so they aren’t personally liable for business debts as long as no illegal, irresponsible or unethical activities are proven to have been enacted under their care.

Who is it for?

This structure is best suited for midsize to large businesses, though some small businesses could still choose this route. Essentially, it’s a good choice for business owners who want to benefit from the flexibility and tax breaks provided by partnerships without worrying about personal liabilities.

What are the benefits?

• Limited Personal Liability: LLC owners generally are not at risk of having their personal assets impacted by business debts, liabilities and other legal structures.
• Less Paperwork: Most LLCs don’t have to file yearly reports, hold regular meetings or keep lengthy records compared to a corporation.
• Taxes: LLCs are pass-through entities and are not subject to business level tax.

4. C-Corporation & S-Corporation

Corporations operate differently than other business structures, as they’re generally considered to be a separate entity entirely. Like LLCs, corporations also provide shareholders with limited liability protection of personal assets. Unlike other entities, corporations have stocks which can be purchased and sold for easy transfer of business ownerships.

There are a few types of corporations, but the most common are:

• C Corporation: C Corporations are subject to corporate level taxation, in addition to the tax deducted on dividends distributed to business owners, also known as double taxation. Double taxation is the main drawback of using a C Corporation and is usually why C Corporations are more suitable for large businesses. Requirements include annual meetings and a board of directors chosen by shareholders. There is also no limit on the number of investors allowed.
• S Corporation: Created specifically for small businesses, S Corporations receive benefits of a corporation such as limited liability protection and stock ownership, while taking away the double taxation. Like other entities previously mentioned, S Corporation is a pass-through entity and the tax on profits are deducted at an individual level. However, some drawbacks include a maximum of 100 shareholders per entity, no foreign shareholder (non-resident aliens cannot be an owner) and they must follow the formalities that come with having a corporation. As such, the option is most popular amongst entrepreneurs, start-ups and small businesses.

What are the benefits?

• Limited Liability Protection: Shareholders have limited liability protection of personal assets.
• Stock Transaction: Purchase and sales of stocks to attract investors to bring cash flow into the business.

Factors to Consider When Choosing a Business Structure

Ensure you know the answers to these questions before filing:

• Growth: Which business structure will give me the most flexibility when meeting future goals?
• Risk: Which legal structures will limit my personal liability?
• Taxes: How can I avoid double taxation for as long as possible?
• Investments: Do I need an option that allows me to receive outside investment?
• Management: Do I need to be the sole person in charge of the business, or will I bring on other partners?
• Legal Requirements: Which regulations, permits or licenses will I need to complete to establish my business as one of these structures?

Final Thoughts

Establishing a small business is no small feat, especially if you’re planning to do it alone. With the proper preparation and knowledge, however, you can ensure the process of choosing a business structure remains uncomplicated and exciting. Be proud — you’re one step closer to achieving your entrepreneurial dreams!

The journey doesn’t end here, though. We want to help you along every step of the way, which is why we’ve crafted Zeffry, an online financial platform designed with modern small businesses in mind. As you bring on new employees to help expand your operation, Zeffry will assist your vision by making the payroll and accounting process as simple as possible. Spend less time fussing over paperwork and more time focusing on what really matters — your vision.

But first, be sure to establish the proper business structure using our tips. We’ll be waiting!