As you begin thinking about starting your first company, registering an existing business officially, or beginning a new venture, you have several options to consider in terms of business structures.
Which is the best for you? Well, that depends on many factors, including the number of owners, the size of your business, the protection you want, and tax considerations.
The main types of business structures include:
- Sole proprietorship
- Limited Liability Company (LLC)
- Nonprofits and cooperatives
This guide will walk you through the basics of each major business structure to help you decide what’s right for you. Let’s get started!
This is the default business structure. Even if you don’t formally set up a business, if you conduct business activities, you are considered a sole proprietor. Unlike most organizations below, a sole proprietorship is not a separate business entity. As with all business structures there are pros and cons of sole proprietorships but some key features include:
- No separation – Your own personal finances are not considered separate from your business’, so you may be personally liable for business debts.
- No shares – You can’t sell shares in your sole proprietorship.
- Personal tax only – You pay a personal tax, not a corporate tax.
- Less trust – Lenders are cautious about sole proprietorships and may decline to offer you loans.
A partnership is a great, simple start-up option for businesses with more than one owner. Partnerships don’t have shares but can be bought into, although partnership interests are more restrictive than shares.
There are two main kinds of partnerships:
- Limited partnerships – One general partner has unlimited liability and must pay self-employment taxes in addition to personal taxes. Every other partner has limited liability—along with limited control—and pays personal taxes.
- Limited liability partnerships – With a limited partnership, all owners have limited liability, so no partner is responsible for the other partners’ actions. All partners pay personal taxes.
Limited Liability Company (LLC)
The LLC is a simple, flexible legal structure that offers many of the benefits of a partnership or a bigger corporation, but can be used by a single owner. Some of the main features of an LLC include:
- Protection – An LLC separates your personal assets from your business, ensuring that no matter what happens with your company, it won’t put your personal savings, vehicle, or home at risk.
- No shares, but percentages – An LLC can’t sell shares, but it can reallocate ownership percentages to new owners buying in.
- Tax options – An LLC enables you to have your business’ profits and losses “pass through” to your personal taxes, avoiding higher business tax rates a professional corporation would pay. Or, you can pay business taxes separately from your own. However, LLC members are classed as self-employed and have to pay self-employment taxes (Medicaid and Social Security).
There are a few different varieties of corporations, but the most essential is the basic professional corporation or C corp:
Corporation (C corp) – An entirely separate legal entity that exists completely separate from its owner(s), a C corporation offers the absolute most protection of any business structure. Some main features are:
- Rigid structure: they require designated roles, such as a board of directors, that other (smaller) structures don’t.
- Stocks: corporations can sell stocks to raise funds.
- Formal reporting: they require significantly more formal record keeping and business procedures than other business structures.
- High cost: they’re more expensive to register.
- Double taxes: you pay corporate taxes separate from your own business income, as well as taxes on dividends.
S corporation (S corp) – An S corporation with certain restrictions that are not recognized in every state. It exists to avoid the double taxation described above. Some distinguishing features are:
- Tax benefit: where applicable, profits and losses “pass through” to personal tax forms (like a sole proprietorship, partnership, or LLC) instead of higher corporate tax rates.
- Shareholder restrictions: no more than 100 shareholders allowed, all of whom must be US citizens.
Benefit corporation (B corp) – This is another special kind of corporation that’s similar to a C corp except that it’s driven not just by profit, but also by a mission of public benefit. In addition to the rigorous documentation required of all corporations, B corps must file benefit reports in some states.
Close corporation – Unlike other corporations, a close corporation has much less formal structure, can be run without a board of directors, and can’t be traded publicly in some states.
Nonprofits and cooperatives
Like B corps, these structures exist for reasons beyond profit distribution. A nonprofit is technically a corporation, while a cooperative is a different structure entirely:
Nonprofit corporation – A nonprofit is unique in that it exists not to create a profit, but rather for public benefit, providing social goods like charity, education, and culture. Some unique qualities of nonprofits include:
- Tax-exempt status: dependent on following special regulations.
- Regulations: profits can’t be distributed to members or certain other individuals inside and outside of the organization (political campaigns, etc.).
Cooperative – A cooperative is both owned and operated for the benefit of its users (user-owners). All members, regardless of share percentage, have the same voting power.
Other structures and considerations
A business owner can choose to combine elements of certain structures above, like an LLC that’s taxed as a C corp or nonprofit. These hybrid structures can be difficult to set up and manage, but, given the right circumstances, a non-standard business structure might make perfect sense for you.
No matter what kind of structure you choose to start, you’ll need to make sure you not only register your business, but also set up any licensing required in your field, get your tax documents prepared, and secure business insurance.
Business insurance made simple
When you’re building your business from the ground up, every expense matters, including insurance. At Thimble we believe business insurance should be customized for your business and work for you so you can focus on growing the business.
- Third-party bodily and personal injury
- Property damage
- Professional negligence
- Legal and medical fees
And, our coverage is custom-tailored to the specific needs of your business. You can purchase plans by the hour, day, or month, so that you’re only paying for the coverage you need. It’s insurance that works when you do.
Whatever business structure you decide on, make sure that both your business and personal assets are protected. Given the sheer amount of options at your disposal, take time to consider what business structure makes the most sense. And, should you need to change it in the future, it’s within your power to do so.