Business Structure

A sole proprietorship is easy to set up and gives you full control of your business. If you operate without registering as another business type, you’re automatically a sole proprietor.

Sole proprietorships don’t create a separate business entity, so your business and personal assets and liabilities are combined. You’re personally responsible for business debts and obligations.

You can still get a trade name, but raising capital is challenging since you can’t sell stock and banks may hesitate to lend. Sole proprietorships are a good option for low-risk businesses or owners wanting to try out their ideas before creating a more formal business structure.

Pro tip: If you operate as a sole proprietorship and use your own last name in your business name, you do not have to file a Fictitious Business Name (FBN) or “Doing Business As” (DBA) statement.

Partnerships are the simplest way for two or more people to jointly own a business. The two main types are limited partnerships (LP) and limited liability partnerships (LLP).

Limited partnerships have one general partner with unlimited liability and all other partners with limited liability and limited control, outlined in a partnership agreement. Profits pass through to personal tax returns, and the general partner must pay self-employment taxes.

Limited liability partnerships give all owners limited liability, protecting each partner from partnership debts and from being responsible for other partners’ actions.

Partnerships are ideal for businesses with multiple owners, professional groups, or teams testing their business idea before creating a more formal structure.

An LLC combines advantages of both corporations and partnerships. LLCs provide personal liability protection, so your assets are generally safe if the business faces bankruptcy or lawsuits. Profits and losses pass through to personal income, avoiding corporate taxes. However, members must pay self-employment taxes for Medicare and Social Security.

In many states, LLCs may need to dissolve and reform if membership changes, unless an agreement exists for ownership transfers. LLCs suit medium- or high-risk businesses, owners wanting asset protection, and those seeking lower taxes than corporations.

A corporation, or C corp, is a legal entity separate from its owners that can earn profits, pay taxes, and be held legally responsible. Corporations provide strong personal liability protection for owners but cost more to set up and require extensive record-keeping and reporting.

Unlike sole proprietors, partnerships, and LLCs, corporations pay income tax on profits, sometimes resulting in double taxation—once at the corporate level and again when dividends are paid to shareholders.

Corporations operate independently from shareholders, allowing business continuity even if ownership changes. Corporations can raise capital by selling stock, which may also attract employees.

Corporations are often chosen by medium- or high-risk businesses, those seeking to raise funds, or companies planning to go public or be sold.

An S corp is a special type of corporation that avoids double taxation by allowing profits and some losses to pass directly to owners’ personal income, bypassing corporate tax rates.

Most states treat S corps like the federal government and tax shareholders accordingly, but some tax S corps above a certain profit level or don’t recognize S corp status at all, treating them as C corps.

To become an S corp, businesses must file with the IRS, which is separate from state registration.

S corps face special limitations. See the IRS for eligibility requirements. You must still follow the strict filing and operational rules of a C corp.

Like C corps, S corps have an independent existence. If a shareholder leaves or sells shares, the S corp continues business as usual.

S corps are suitable for businesses that would otherwise be C corps but meet the S corp filing criteria.

A benefit corporation is a for-profit corporation recognized by a majority of U.S. states. Benefit corporations are different from C corps in purpose, accountability, and transparency, but aren’t different in how they’re taxed.

Benefit corporations are driven by both mission and profit. Shareholders hold the company accountable to produce some sort of public benefit in addition to a financial profit.

Some states require benefit corporations to submit annual benefit reports that demonstrate their contribution to the public good.

There are several third-party benefit corporation certification services, but none are required for a company to be legally considered one in a state where the legal status is available.

Close corporations resemble B corps but have a less traditional corporate structure. These shed many formalities that typically govern corporations and apply to smaller companies.

State rules vary, but shares are usually barred from public trading. Close corporations can be run by a small group of shareholders without a board of directors.

Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don’t pay state or federal income taxes on any profits it makes.

Nonprofits must file with the IRS to get tax exemption, a different process from registering with their state.

Nonprofit corporations need to follow organizational rules very similar to a regular C corp. They also need to follow special rules about what they do with any profits they earn.

For example, they can’t distribute profits to members or political campaigns.

Nonprofits are often called 501(c)(3) corporations—a reference to the section of the Internal Revenue Code that is most commonly used to grant tax-exempt status.

A cooperative is a business or organization owned by and operated for the benefit of those using its services.

Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.

Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative.

Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote.