The 8 Most Common Business Structure Types and How To Choose One

The business structure you choose impacts your whole company. It impacts how you integrate day-to-day operations with your bottom line. Plus, it can optimize key factors such as control, taxes, and liability.

Learn about the most common business structure types to choose the best one for your needs.

What Are the General Types of Business Structures?

A business structure is the set of rules that guides high-level business operations. But it’s hard to know which business structure works best for small businesses or large organizations.

Let’s take a closer look at the four main categories:

• Sole proprietorships are owned by one person. They merge business and personal finances without liability protection. And don’t forget to keep your receipts. These structures offer pass-through taxation. This means they don’t pay corporate taxes.
• Partnerships involve two or more co-owners. They work together to manage operational, financing, and liability responsibilities. These partnerships also enjoy pass-through taxation.
• Limited liability companies (LLC) separate liability from ownership. This means the owner or owners’ personal assets are protected. They aren’t threatened by debt, lawsuits, or legal claims against the company. LLCs only pay taxes on profits once.
• Corporations are completely independent entities. They have the legal right to raise money by selling stocks that confer ownership rights. Also, in corporations, profits are taxed twice. This happens once as personal income, and once as corporate tax.

Large companies with complex needs and higher capital usually opt for corporations. Sole proprietorships, partnerships, and limited liability companies work best for small businesses.

RELATED ARTICLE — Invoice vs. receipt: Is an invoice the same as a receipt? 

A Guide to the 8 Most Common Business Structures Every Entrepreneur Should Know

You have several options to choose from when registering your company. Let’s take a look at variations on the major structures listed above:

1. Sole Proprietorship

A sole proprietorship is an unincorporated business entity. It’s owned and operated by a single individual. Sole proprietorships are easy to understand and operate. Plus, they don’t have special filing requirements.

Someone providing a service or selling a product is a sole proprietor by default. But they can elect to register a company as a different type of business structure.

It’s best for:

• Freelancers
• Consultants
• Independent retailers

2. General Partnership

This is the most common form of partnership. General partnerships are taxed once at the business level and once at the partners’ personal income levels. Each partner has an equal share of control over the company’s operations and finances.

3. Limited Partnership

Limited partnerships limit liability to the amount of capital invested by each partner. This flexible structure is attractive to potential partners who are cautious about investing.

4. Limited Liability Company

An LLC legally separates a business from its owners. It protects them from business debts and lawsuits.

LLCs limit liability and let owners decide between pass-through or corporate taxation. They also allow owners to reinvest profits. Then, the owner can use the remaining post-corporate tax freely. Opting for corporate taxation can reduce the personal tax burden for owners.

5. C Corporation

C Corporations are the most common type of corporation. They shield owners from liability, just like LLCs. But they make fundraising easy via stock issuance. This lets them attract unlimited capital.

These advantages come with a lot of forms and a lot of red tape. A C Corporation is a complex organization with a complicated registration process. These corporations must also appoint a board of directors. This is so control of the company doesn’t rest fully in the hands of the owners. 

What’s more, C Corporation profits are taxed at the corporate and personal levels. Unlike LLCs, pass-through taxation isn’t an option.

RELATED ARTICLE — What Is a Proforma/Pro Forma Invoice? 

6. S Corporation

S Corporations offer similar benefits to C Corporations. But they’re only taxed on the personal income of owners and shareholders. This lets them bypass corporate taxes.

The downside of S Corporations is that fundraising is limited. For example, a maximum of 100 shareholders are allowed to own stock in an S Corporation.

7. B Corporation

B Corporations are for-profit corporations that emphasize social and environmental impact. They must meet most of the requirements of a C or S Corporation. But they must periodically prove their impact.

The board of directors is legally obligated to consider this impact as well as profits when making decisions.

8. Nonprofit

Nonprofits are often structured as corporations. But they’re required to reinvest all profits back into the organization by law. They’re tax-exempt due to their focus on the public good.

The Importance of Choosing the Right Business Structure

The best structure for your company depends on your organization. All legal business structures have trade-offs. 

Sole proprietorships simplify taxes and let the owners stay in control. But they have few chances to raise capital from external sources.

Corporations provide well-established rules for fundraising. But they have complex tax status and have to give control to a board.

Consider what would be best for your company when choosing a structure. That could be fundraising opportunities or tax cuts.  

4 Factors To Consider When Choosing a Business Structure

Now that you know what business structures are and why they matter, it’s time to choose one for your company:

• Control. Decide if you want full control over your operations and finances. If you have a small business, consider a sole proprietorship, partnership, or LLC. These let you and your partners have control of the company.
• Liability. If your business has risks of lawsuits, accidents, or major debts, consider an LLC or corporation. These structures limit personal exposure by separating business assets from yours.
• Fundraising Needs. Corporations are ideal if you plan to scale or need significant capital to compete. They allow access to public investment capital. Other structures are confined to private funding sources. These could be commercial loans or investments from the owners’ personal assets.

FAQs

1. Do I need a lawyer or professional service to set up my chosen business structure?

Setting up basic structures like sole proprietorships, partnerships, and LLCs is straightforward. You don’t usually need a lawyer.

But the stock issuance process and regulatory demands of corporations are complex. They typically need professional resources to set up. 

2. Why are there so many business structure options and differences in requirements?

The variety of business structure options reflects the different needs companies have. That includes liability, capital, taxation impacts, and more. It wouldn’t make sense for a freelancer to have the same regulations and taxation as a multinational conglomerate.

RELATED ARTICLE — What is a tax invoice?

Business Expense Tracker

Our in-app receipt scanner makes it easier than ever to streamline expense tracking. That’s true for sole proprietorships, corporations, and everything in between.