Small Business 101: An Overview of Different Business Structures

Selecting how you structure your business is a crucial step in your entrepreneurial journey. But you need to take this step very cautiously. Your ownership choice determines how your company is organized, taxed, and held legally accountable — making it a cornerstone of your business’s success.

There are several famous business structures, and learning about each can help you make informed decisions that will help you build your business’s future.

Here are five types of business structures to consider.

1. Sole proprietorship

A sole proprietorship is the simplest form of a small business. In this structure, a single individual owns and operates the business. That person is personally responsible for all aspects of the company, including decision-making, finances, and management.

This structure has pass-through taxation — that is, the taxes pass through the business and onto the owner and are taxed only once. Examples of sole proprietors include artists, freelance writers, and consultants.

Pros:

• Easy and inexpensive to set up.
• Complete control over the business.
• Direct access to profits.

Cons:

• Unlimited liability.
• Limited access to capital.
• Potential for long work hours.

2. Partnership

Partnerships involve two or more individuals or entities co-owning and managing a business. The partners each own a percentage of the entire industry and receive profits in that proportion from the company. 

Partnerships can be structured in multiple ways —  general partnerships, limited partnerships, and limited liability partnerships (LLPs). Each is unique and has its own liability rules. Partnerships are a common feature of professional services, such as law firms and medical practices.

Pros:

• Shared responsibilities and decision-making.
• Diverse skills and resources.
• Reduced financial burden.

Cons:

• Shared profits.
• Less independence.
• Potential for conflicts.

3. Limited liability company (LLC)

LLCs are a flexible and popular choice for small businesses. They combine the liability protection feature of a corporation with the tax benefits of sole proprietorships. LLCs are common among small businesses like restaurants, retail stores, and tech startups.

Pros:

• Easy to establish.
• Limited personal liability.
• Flexible management structure.
• Tax benefits.

Cons:

• Complex paperwork.
• Additional tax filing requirements.
• Limited life.

4. C corporation

A C corporation is the most complex business structure. It will provide you with the highest level of liability protection, but setting one up entails substantial paperwork and administrative work. 

Besides, they are taxed twice — first on a business level and then individually when owners receive profits. As a result, this can be a good choice for medium- or higher-risk businesses seeking sustained capital infusions. Firms with long-term exit plans that include going public or an eventual sale may also start as C corps.

Pros:

• Limited liability for owners.
• Easier access to capital.
• Perpetual existence.
• Multiple classes of stock.
• An unlimited number of investors.

Cons:

• Expensive to set up.
• Double taxation.
• Complex legal and tax requirements.
• Additional administrative tasks.

5. Corporation

These are similar to C corporations but may only consist of up to 100 shareholders and one class of stock. They are pass-through entities like partnerships, so profits pass directly to the owner/shareholder, where they are taxed (only once). 

Pros: 

• Limited liability for management and shareholders.
• No double taxation.

Cons:

• Cumbersome and complex incorporation process.
• Ongoing fee requirement.
• Limited ownership.

The final word

There is no one entity or way to incorporate your business. Depending on your requirements, use the guide above to weigh the pros and cons of various business structures to find the one that gives you the right balance of legal protections and benefits. 

Want to know more about starting your small business? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today. 

This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.