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An entrepreneur’s journey to start a business comes with several stages, one of which is choosing the ideal business structure. This involves understanding how to structure a small business from a tax and legal perspective.
So, what types of businesses are there? Businesses opt for a structure that suits their needs. Generally speaking, a business structure can be defined as the legal representation of how a company is organized. It shows how the profits of a company should be divided and who are the owners. Read our article on how to choose your business structure to know more.
If you already have the ideal business structure in mind and are ready to file company registration documents, Northwest Registered Agent is the best choice for you! It lets you form your company for $39 only!
What Are the Different Types of Business Structures?
Before you register your business, you will be required to choose a business structure. Your chosen business structure will influence different factors, such as the amount of taxes you will pay, required paperwork, daily operations, raising capital funds, and risk of personal liability.
When it comes to choosing from the various types of business structures, make sure you pick the right one for your business. Changing your business structure once your business has launched is a costly and restrictive process. Also, it helps to consult with an attorney, business counselor, or accountant before finalizing your decision.
1. Sole Proprietorship
This type of business structure is owned and managed by one individual. It’s an unincorporated business entity, and it’s ideal for business owners looking to sell a product or a service by themselves. There isn’t any legal distinction between the business entity and its owner.
Pros of a Sole Proprietorship
- Less paperwork involved: There’s less paperwork involved, for example, you don’t have to register with your state government before doing business
- EIN not required: You don’t need an EIN from the IRS. You have the choice to use your SSN (social security number) for financial transactions when needed
- Convenient: Setting up the business is an easy process compared to other types of business structures
- Complete control: Being the sole owner, you are in complete control of all the decisions
- Low costs: It comes with low costs and fees, such as saving on registration fees
- A pass-through entity: This type of business structure is considered a pass-through entity, which means you don’t have to pay separate taxes for your business as everything is reported on the personal tax return of the owner
- Easier banking: You just need your checking account in order to start, which makes banking easier. Just make sure to keep your personal and business finances separate
Cons of a Sole Proprietorship
- Absence of liability protection: There’s no liability protection because sole proprietors don’t register their business
- Difficult to obtain funding: It’s harder to get funding for this type of business structure since banks prefer working with established businesses
- Difficult to sell the business: Selling your business becomes harder, in case you decide to move on to something else or in the event of your demise
If you’re interested in starting a business with someone else, then a partnership is the ideal business structure for you. This business structure also works if you are looking to test your business idea with a partner before properly launching it.
Moreover, a partnership isn’t a legal business entity, therefore, you don’t have to register it with your government. However, there is a partnership agreement that all involved parties have to sign.
Types of Partnership
1. General Partnership
This is the most common type of partnership, where all partners just have to sign an agreement, as mentioned above. Also, both the ownership and the profits are shared among the partners. Each partner also comes with different liabilities, meaning they have their own obligations.
2. Limited Partnership (LP)
This type of business partnership is authorized by the state. In a limited partnership, one partner is responsible for operations, while the other limited partner or partners are responsible for the funding. This means the limited partners aren’t responsible for any liabilities or debts.
3. Limited Liability Partnership (LLP)
This partnership type is similar to a general partnership, meaning all parties are involved in the business. But, each partner has different responsibilities depending on their roles in the organization.
Also, each party is responsible for the debts and legal liabilities within the business, but one party isn’t responsible for the errors made by a different party.
4. Limited Liability Limited Partnership (LLLP)
This partnership type is only available in a couple of states in the US. It’s similar to a limited partnership, where one partner controls the business. But, in an LLLP, the liability of the general partner is limited. This means that each partner comes with their own liability protection. Also, an LP can be converted into an LLLP, if all partners agree to it.
Pros of a Partnership
- Less legal obligations: There are few legal obligations, meaning a partner is free to leave whenever they want unless an agreement has been signed
- Easy to set up: It’s easy to get a partnership started since there is no need to register the business
- Responsibility is divided: All partners share the responsibility of running a business, as compared to some other types of business structures
- Increased knowledge: Due to the presence of multiple partners, there is more access to skills, knowledge, and experience, such as having more contacts
- Great decisions: All partners bring their own unique perspective, which means there’s better decision making
- More partners lead to more capital: Multiple partners mean more capital can be invested into the business
- Ease of access to profits: Since the profits are shared, they directly get transferred to each partner’s personal tax returns instead of getting retained in the partnership
Cons of a Partnership
- Liabilities: All partners have to share business losses and are responsible for debts, even if one partner is the one who incurred it
- No autonomy: All decisions are made jointly, which means you aren’t in full control of the business
- Complications among partners: Emotional conflict could result in different issues arising, such as a partner not putting in any effort or having differences of opinion
- Problem selling the business: You can have difficulties selling the business in the future if one of the partners doesn’t want to
- No stability: There is a lack of stability, even if you have a good exit strategy within your agreement
3. Limited Liability Company (LLC)
This type of business structure is a combination of other business structures. It offers the tax advantage of a partnership and the personal liability protection that comes with a corporation. Business owners of an LLC are referred to as members, and an LLC can have unlimited members. There are millions of businesses in the US that are known as LLCs.
Types of LLC
1. Single-Member LLC
This type of LLC comes with low startup costs and less paperwork, which makes it ideal for solo entrepreneurs. However, you will be fully responsible for all legal obligations, such as debts and taxes.
2. Multi-Member LLC
This LLC type consists of multiple members, but the setup process is easy. All members are required to sign an operating agreement. Moreover, the members are responsible for managing the LLC.
3. Domestic LLC
This is a business that was formed and operates from its home state.
4. Foreign LLC
This is where a business operates in a different state than the one it was registered in. For example, an LLC operating from North Carolina, while the owner lives in Wisconsin, will be considered a foreign LLC in North Carolina.
5. Series LLC
This business type consists of a main LLC and other mini LLCs inside it, known as cells or series LLCs. A single cell consists of its own managers, members, and assets, and has its own purpose. Each cell is considered a separate entity, which means it’s solely responsible for debts or liabilities.
6. Low-Profit LLC (L3C Company)
This business type is said to be a hybrid because it attracts private investment in ventures and philanthropic capital in order to produce profits for the betterment of society. This gives the company a label of a not-for-profit institution with the help of marketing strategies, while also generating a profit.
7. Anonymous LLC
This business structure hides the identities of the owners, members, or managers. It minimizes legal liability and helps in protecting your privacy. The owners of a business stay out of the public record. Also known as ‘Private LLC’ or ‘Confidential LLC.’
8. Restricted LLC
This LLC type is beneficial for the ones who want lower tax rates while transferring assets to their family members. This type is not really ideal for traditional business dealings. It’s helpful for individuals with more than one property.
9. Professional LLC
Professionals who need state regulatory board licenses for trading purposes opt for a PLLC legal structure. This is for individuals like medical providers, legal advisers, accountants, and so on.
A PLLC works similarly to other LLCs. However, California is an exception where professionals can’t opt for a PLLC or even an LLC. They would have to create a professional corporation or an LLP.
Pros of LLCs
- Limited liability protection: Members are not liable for the company’s actions, meaning their personal assets remain protected from creditors
- All members receive profits: The members will directly get the profits and not get taxed, since an LLC is a pass-through business structure
- Easy to manage: Since members are responsible for managing an LLC, all owners share the daily decision-making tasks
- Easy to set up: Establishing and controlling an LLC is an easy process. There are minimum fees involved in an LLC
Cons of LLCs
- Limitations: This type of business structure has certain limits when it comes to limited liability. For example, if you run your business in a fraudulent way that resulted in losses for others, a judge will rule that your business won’t protect your personal assets
- Taxes: LLCs are seen as partnerships by the IRS when it comes to taxes, such as self-employment tax
- Issues arise when a member leaves: A member leaving can result in the business going bankrupt or dying. In this case, the remaining members will be responsible for the financial and legal obligations
This type of business structure is considered to be a separate legal entity from its owners, who are also called shareholders. Multiple people or/and other entities own a corporation. Ownership can be transferred through the selling and purchasing of stocks.
Business owners who want a formal business structure and wish to take their business globally in the future opt for corporations. As a business owner, you have to follow the legal requirements of your state when becoming a corporation. Once you have filed all necessary paperwork with the secretary of state, your business is officially a corporation.
Types of Corporations
1. S-Corporations (S-corps)
S-corps don’t have to worry about double taxation, but there’s limited personal liability. It’s seen as a pass-through entity. Also, all shareholders in an S-corp should be US citizens.
2. C-Corporations (C-corps)
This is the most common corporation type. It’s seen as a separate entity and can have multiple shareholders. The ownership is assigned based on the company’s stocks that can be sold or bought.
3. B-Corporations (B-corps)
This business structure is relatively new and is seen as a for-profit business structure. This means that a B-corp business is dedicated to the betterment of society. You have to meet certain criteria in order to become a B-corp, such as getting a score of 80 or above on your B Impact Assessment. Plus, the tax status as a B-corp is similar to that of an S-corp or C-corp.
4. Closed Corporations
This business structure is seen as an incorporated partnership, family corporation, or private company. It’s owned by a couple of shareholders. It can be hard to raise capital since the shares aren’t publicly traded. But, the owners do have limited personal liability benefits.
5. Non-Profit Corporations
This business type is exempted from taxes by the IRS since its responsible for a social cause that benefits the public. However, since it’s a non-profit, all profits are used to operate the business and aren’t divided among the owners.
Pros of Corporations
- The most personal liability protection: This type of business structure offers more personal liability protection as compared to other structures
- Security in business: There’s more flexibility when it comes to transferring ownership, therefore, there’s more business security
- Easy to obtain more capital: Owners can sell stocks to access more capital and raise funds
- Tax benefits: All corporations enjoy numerous tax benefits, excluding S-corps
Cons of Corporations
- Too much paperwork: The application process is quite lengthy and there’s a lot of paperwork involved, which can sometimes take months
- Rigid protocols: There are numerous regulations and formalities to follow to maintain a corporation, such as holding yearly meetings, maintaining a board of directors, and so on
- Double the taxes: Some corporations have to go through double taxation, such as S-corps
- Expensive to run: Running a corporation can be expensive, especially in the initial stages
This is a type of business structure that benefits the individuals using its services, meaning all profits are divided among its members, who are also called user-owners. A board of directors are responsible for running a cooperative. The regular members have the power to vote when it comes to controlling the direction of the business.
Members can join a cooperative by buying its shares. Also, the number of shares they purchase doesn’t impact the weight of their vote, as all members are treated equally.
Types of Cooperatives
1. Consumer Cooperatives
This cooperative type is owned by members who utilize the co-op to buy goods or services. This way the co-op is able to provide a better selection, availability, pricing, or product/service delivery to each consumer. Consumer cooperatives are present in various sectors, such as housing, childcare, credit unions, and so on.
2. Worker Cooperatives
Workers have the ownership to these types of businesses. Therefore, the worker-members handle all operations and decide on where to take the business. Profit is distributed among the worker owners based on different factors, like hours worked, job position, salary, and so on.
3. Producer Cooperatives
These types of cooperatives are owned by individuals who manufacture similar goods or services. Through this co-op, members are able to better negotiate price and are able to access a larger market.
4. Purchasing Cooperatives
This co-op type combines member demand in order to create better pricing of products or services, which also includes their availability and delivery. Organizations or businesses tend to opt for purchasing co-ops, instead of individual consumers, in order to manage their operations efficiently.
5. Multi-Stakeholder Cooperatives
This cooperative type is owned by multiple members with different interests and roles within an organization. Members consist of consumers (businesses or individuals), investors, producers, or workers.
Pros of Cooperatives
- There’s an atmosphere of cooperation: Cooperative advocates support the psychological and social influence that comes from worker-control parameters
- A democratic business structure: All needs of members are met and they are all responsible for making decisions
- Several economic advantages: Members receive great economic benefits, such as patronage dividends in consumer cooperatives
- Employees are more involved: Since employees have more say in the business’s outcomes, they tend to be more engaged
- Less taxation: Members are taxed only one time on their income from the co-op itself, rather than being taxed separately
Cons of Cooperatives
- Issues with obtaining more capital: Due to fewer capital incentives, a co-op doesn’t attract big investors. They also have difficulty getting loans
- Several disadvantages with investment: They have to go through interrelated investment disadvantages, such as underinvestment or intra-firm financing
- Low-quality marketing: The marketing is generic, which impacts the appearance of the brand
- Decision-making takes a long time: It takes longer to make decisions while waiting for all owners to weigh in
- No advantage over the competition: A co-op doesn’t have an edge over its competitors since they share similar price ranges
6. Joint Venture
This type of business structure is a combination of multiple separate business entities. In a joint venture, different organizations gather their resources in order to achieve a specific goal, usually on a temporary basis. For example, buying and operating a piece of real estate.
Pros of a Joint Venture
- More knowledge and experience: Different individuals bring their expertise to the project
- Better resources: There are more available resources, like equipment or capital resources
- No need for long-term commitments: Since joint ventures are temporary agreements, no one is legally bonded to stay
- Everyone shares everything: All parties involved share the profits
- Financial benefits and business growth: When multiple individuals work together, a joint venture has the potential to financially prosper and grow in size
Cons of a Joint Venture
- More entities lead to more complications: Conflict and communication gaps might happen due to the presence of multiple entities with different opinions
- Commitment problems: Since no one is legally bonded to stay, members might not be committed fully
- Jurisdiction issues: There might be jurisdiction issues when a joint venture includes parties from various countries
- Issues with communication: There might be a language barrier between different regions, therefore, a translator might be needed
- Too much research and paperwork: Proper research and planning is required, which includes all legal documents, too. This can be a lengthy and costly process
Different Types of Business Structures – Conclusion
When it comes to the different types of business structures, understanding the needs of your business is imperative before finalizing your decision. Study each business structure and compare it with your business goals.
Once you have decided on your ideal business structure, the next step is to register your small business. Visit Northwest Registered Agent to learn more.
Do you want more business-related information? Read our article on the mistakes you should avoid when starting a business and learn why you should open a business bank account.