Before you can turn your business idea into a reality, you’ll need to choose which legal structure will serve as its foundation.
Your business structure is no mere administrative detail. How you structure a business determines:
- Your corporate and personal income tax
- How the day-to-day operations of your business are run
- Your financial liability for business debts
- How you’ll pursue investment and fundraising
Read on to learn about the different types of business structures available for your small business, and how to decide which one is right for you.
What types of businesses are there?
The 10 types of business are:
- Sole proprietorship
- General partnership
- Limited partnership
- Limited liability partnership (LLP)
- C公司
- S corporation
- Benefit corporation
- Limited liability company (LLC)
- Nonprofit
- Joint venture
Business entities and tax status
Different types of businesses qualify for different tax treatment by the US Internal Revenue Service (IRS), as well as state and local tax authorities.
Tax status include:
- Pass-through tax status.在这些类型的业务es, taxes are “passed through” from a company to its shareholders, who pay personal income tax on the dividends they receive.
- Corporation tax status.Corporations (specifically C corporations) are taxed twice: once on corporate income and again at shareholders’ personal income levels.
- Nonprofit tax status.Nonprofits are exempt from some taxes (mainly on income) at the federal and state levels, so long as they meet certain eligibility requirements as defined by the IRS and state tax authorities.
10 types of businesses
The way you organize your business depends on whether you are acting alone or with partners, how much personal liability you are willing to accept, and whether you need to issue shares to investors in order to get your business started.
Sole proprietorship
Asole proprietorshipis an unincorporated business entity owned and operated by a single individual. Its main advantage lies in its simplicity: sole proprietorship is the default business entity designation for anyone selling a service or product themselves, and requires no special filing. In addition, a sole proprietor has unfettered control over his or her company, and enjoys a single round of taxation on personal income.
Nevertheless, the ease of setting up a sole proprietorship is a double-edged sword, as this business type offers the lowest protection for owners. Sole proprietors are fully liable for their companies’ financial and legal liabilities. This means that if your business falls on hard times, your bank can come after your personal assets to settle your business’s debts.
普通合伙(GP)
General partnershipsare the default form of partnership: a business owned by two or more people. Like sole proprietorships, general partnerships are subject to pass-through taxation, meaning they are only taxed once at the partners’ personal income levels. In addition, general partners are equal participants in the firm, meaning everyone has a say.
However, general partnerships are vulnerable to some of the same drawbacks as sole proprietorships. Because there is no legal distinction between the general partners and the partnership itself, all owners are subject to unlimited liability for the company’s debts and damages. Creditors and lawsuit plaintiffs can reach partners’ personal assets, and general partners are liable for the business conduct of all other partners.
Limited partnership (LP)
Like general partnerships, limited partnerships are owned by two or more people, and enjoy pass-through taxation. The keydifference between LPs and GPsis the existence of limited partners, who enjoy limited liability up to the amount of capital they’ve invested in the business. Each limited partnership must have at least one general partner, however, who is subject to unlimited liability.
One downside of a limited partnership is that limited partners generally don’t have much say in the day-to-day running of the firm. This can be challenging for the partner who’s conscious about personal liability, but also has ideas about how to run the business more effectively.
Limited liability partnership (LLP)
The final type of partnership, LLPs are owned by two or more partners and enjoy pass-through taxation. While partners in an LLP are liable for their own conduct, they are not personally liable for the conduct of other partners or the debts and damages of the business.
The main disadvantage of the LLP business type is that it is not available to all businesses: LLPs are exclusive to certain licensed professions, such as law or accounting.
C公司
C公司s, or C corps, are one of the most common types of corporation, and the ideal ownership structure for a large company. That’s because a C corporation is a legal entity that’s completely separate from its owners, thus offering the strongest protection to owners from personal liability.
Another advantage of forming your small business as a C corporation is the relative ease of fundraising. C corps can be funded by issuing shares of stock. You can issue as many shares as you like, as well as offer both common stock and preferred stock types.
One drawback of C corps compared to other types of business is that each C corp is a complex business organization requiring an intensive filing and registration process, as well as extensive oversight via the drafting of bylaws and appointment of a board of directors.
Above all, however, the main downside of forming a C corp is that you will not enjoy pass-through taxation status. That is, C corporations pay income tax twice: on corporate income and again on the personal income of owners and shareholders.
S corporation
S corporations, or S corps, sidestep the double taxation problem that C corps face. Like partnerships, S corps are pass-through entities, which means that instead of paying corporate income tax as a business entity, they are taxed only once, at the owners’ and shareholders’ personal income levels.
That advantage is offset, however, by limits on fundraising and complexrequirementsfor keeping S corp status. For instance, S corps may only issue common stock to a maximum of 100 shareholders, and those shareholders must be individuals who are citizens or permanent residents of the United States.
Benefit corporation
A benefit corporation, sometimes called a B corp, is a different type of for-profit corporation, recognized by most US states. While they’re taxed the same way as C corps, benefit corporations place added emphasis on making a positive impact on society, their communities, and the environment.
While a benefit corporation can both do good and generate profits, it’s subject to the same requirements as C corporations. Plus, a benefit corporation must demonstrate its commitment to a higher calling by publishing an annual report assessing its social and environmental performance.
Limited liability company (LLC)
Limited liability companiesmeld many of the characteristics of a partnership with those of a traditional corporate legal entity. LLCs are distinct legal entities from business ownership, thus protecting owners from personal liability for the debts and damages of the firm.
An additional advantage of forming your small business as a limited liability company is the tax flexibility it affords: LLCs can opt to be taxed as corporations (twice), or as pass-through entities, like sole proprietorships or S corps.
The downside of forming a limited liability company is that the process is far more complex than that of a sole proprietorship or partnership. For instance, an LLC must write and file articles of incorporation, and appoint a registered agent.
Nonprofit
A nonprofit is a business that has been granted tax-exempt status by the IRS on the basis that it advances a social cause benefiting the public in some way. In essence, nonprofit refers primarily to a business’s tax status, as most nonprofits are set up as corporations.
The main advantage of forming your small business as a nonprofit is the tax benefit: if your organization qualifies as a 501(c)(3) tax-exempt organization under the Internal Revenue Code, it won’t have to pay federal income tax.
Nevertheless, nonprofits are are extremely limited in the line of business they can pursue, and may not use profits for anything other than continuing to operate the business.
Joint venture
A joint venture is essentially a partnership between one or more separate business entities. In these types of business arrangements, firms agree to pool resources toward the achievement of a specific task, often on a temporary basis. This can be a specific project, or the purchase and joint operation of a piece of real estate, for example.
The upside of joint ventures as a business structure is that they allow participants to benefit from the resources of other participating firms without forfeiting independence by merging them into one organization. The main disadvantage, however, is that each participant is responsible for all the costs and losses of the joint venture.
Determining which business structure is right for you
Determining what structure is right for your small business is one of the most important decisions you will make on your entrepreneurial journey. There are a number of questions you (and any partners) should consider before making a selection, such as:
- How important is the ability to raise money to your business’s financial future?
- Do you prefer complete control over your company, or do you want partners?
- Are you willing to accept unlimited personal liability for the business and conduct of any partners, or would you prefer a level of protection?
- Are you able to pay two rounds of federal taxation?
- Is your business’s mission oriented toward the advancement of some social good for the public benefit?
Types of business FAQ
What are the 4 main types of businesses?
What are the 10 types of business?
- Sole proprietorship
- General partnership
- Limited partnership
- Limited liability partnership (LLP)
- C公司
- S corporation
- Benefit corporation
- Limited liability company (LLC)
- Nonprofit
- Joint venture