Before starting your business, it’s important to research and choose a legal structure that best suits your needs. Not only will a well-defined legal structure help keep things in order internally, it will also set the guidelines for how you’ll continue to operate and grow. You’ll want to thoroughly assess your business’s current and future financial needs and goals, your comfort level when dealing with risk, and your ability to scale. There are many types of structures to consider, and a simple pros vs cons chart that you can measure against your goals is a great way to get started.1
What is a business structure?
So, what exactly is a “business structure” anyway? It may also be referred to as “business ownership structure”, “legal business form”, “company structure”, “organizational setup”, or other similar names. There are more than a few commonly used options when it comes to legal business structures that include, but are not limited to, limited liability companies (LLCs), different kinds of partnerships, sole proprietorships, corporations, non-profits, co-operatives, and more. Each option has its own nuances, benefits, and drawbacks. While finding the right type of business structure may seem overwhelming at first, it’s worth doing some of your own research before involving legal counsel— which you will most likely want to do at some point in this process prior to launching your business.2,3
Types of business structures
To determine which structure best suits your business, explore the definitions on the various types:
1. What is a partnership business?
A partnership structure is created to legally allow two or more individuals to conduct business as co-owners by way of a legal agreement. This type of business structure is easy to set up and fairly easy to dissolve. Typically, it requires all partners to contribute capital or collateral to get the business going, but it also allows for a partner to opt out and reclaim their share of their investment if they so choose. Partnerships also benefit from what is known as “pass-through” status, meaning that the owners are directly taxed individually on their income after accounting for their individual share of profits and losses. Pay close attention when forming your partnership as legal requirements vary state to state.2,4
2. What is a sole proprietorship?
Just as the name suggests, this type of structure is one in which an individual legally becomes a business owner and operates the organization on his or her own with room to grow later. This is by far, the most common type of business structure and is the easiest to set up. The individual business owner has the right to make any and all financial and business decisions alone. As a sole proprietor, you would however be personally responsible for all expenses, debts, liabilities, and legal issues your business may encounter, making it very important to have good legal counsel and accounting services.4
3. What is an LLC?
A limited liability company (LLC) is a particular type of business structure that combines both the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. It has become one of the most popular structures because of the flexibility it provides to business owners. Be sure to check your state’s documentation as regulations may vary.5
4. What are some different types of corporations?
Legal entities that are separate and distinct from their owners are known as corporations. Here are a few types:
a. S Corp vs C Corp
The main difference between an S corporation and a C corporation rests squarely in the realm of taxation. In a C corporation, the business pays tax on the income as well as paying taxes on whatever income is received as an owner and/or employee. In an S corporation however, you and the other owners must report the company revenue as personal income and are then taxed accordingly.4
b. What is a nonprofit corporation?
Nonprofit corporations were established to grant federal tax exemption to organizations that contribute to the betterment of the public, such as charities, educational institutions, religious organizations, and more . Because the work is intended to benefit the public, nonprofits don't pay state or federal income taxes on any profits they generate.
Choosing a business structure
The type of legal business structure you choose will depend on several factors and influence things like liability, taxation, payroll, and record keeping. The key is to find the best fit for your organization’s current and future goals. It can prove difficult to move backwards in the event that you need to change your business structure once you’ve registered your organization, so be sure to give it some serious thought. After you choose a structure, your next step should involve legal counsel. You’ll want to strike a balance between what offers you the best benefits and provides plenty of legal protection. Visit the Business Solutions Center for more resources on launching a business.2,3