Updated: Dec 20, 2022
When setting up your business, it’s important to select a business structure that best suits your needs. The type of business structure you choose will impact your financial and personal liabilities.
Here are the most common business structures:
This is the default business entity type - you are the sole owner and your business is NOT a separate business entity. In other words, your business assets and liabilities are not separate from your personal assets and liabilities. If you have a low-risk business and are just starting out, you may want to consider a sole proprietorship before forming a different business structure.
As the name implies, this structure is for two or more people who own a business together. The most common partnerships are:
1. Limited Partnerships (LP)
This structure allows for one general partner with unlimited liability, while the other partners (who usually have limited control over the company) have limited liability. Profits are passed through personal tax returns.
2. Limited Liability Partnerships (LLP)
An LLP is similar to the LP, except each partner has limited liability and each partner is protected from debts against the partnership, they won’t be responsible for the actions of other partners.
Limited Liability Company (LLC)
This structure protects small business owners from personal liabilities in most cases. Profit and losses can get passed through to your personal income without facing corporate taxes. A single owner can become an employee of their own LLC under a corporate status. Owners are considered self employed so they must pay self-employment taxes. This is a good option for medium to high risk businesses, owners with significant personal assets and owners who want to pay a lower tax rate than they would under a corporation status.
A C Corp is a legal entity of one or more owners that is kept separate from the owner’s personal liability and is taxed at the corporate rate tax. While this structure has the strongest protection for the owners from personal liability, the cost to form and maintain is much higher. There can be a Board of Directors and shareholders. This structure is best for large businesses, if you want to go public and offer stock or if you want to attract investors.
Unlike a C Corp, this structure is designed to avoid double corporate taxation on some profits and losses paid to the owners. You must verify eligibility and file with the IRS to get this status.
Also owned by one or more persons, nonprofits are organized to do charity, education, religious, literary or scientific work that benefits the public. Once the business receives the IRS tax exemption, nonprofits do not pay state or federal income taxes on profits. The business provides legal protection to the members so they are not held personally responsible. Money earned goes into the business to pay employees, cover overhead and to grow the organization.
Disclaimer: The information provided on this website does not, and is not intended to, constitute financial or legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information may not constitute the most up-to-date legal or other information. Readers should contact their CPA and/or attorney to obtain advice with respect to any particular matter.