What Are the Different Types of Business Structures?

When you’re in the beginning stages of starting your new business, one of the first decisions you’ll make is which business structure to choose. This is an important decision, because it affects the tax structure of your business, and determines which forms you’ll submit to the Internal Revenue Service (IRS).

Sole Proprietorship

Some specifics about Sole Proprietorships:

  • Sole Proprietorships are businesses owned by one person, or a married couple.
  • These are the most common form of business structure for small and micro businesses.
  • Allows for flexible management of your business.
  • The most simple form of business structure.
  • You are personally liable for any debts accrued by your business.

Partnership

A Partnership consists of two or more business partners. Each partner contributes to the business financially and by contributing skills or labor. Partners share in the profits from the business, and are also responsible for the losses and debts. There are three types of partnerships. Here’s information about each:

1) General Partnership:

This business structure assumes that each partner is equally invested in the company—he has contributed the same investment, works the same amount of time in the business and will receive equal shares of profits, as well as being equally responsible for debts and losses. If all partners don’t have equal stakes in the business, the various percentages should be clearly laid out in a Partnership Agreement.

2) Limited Partnership:

This structure works best for partners who are unequally invested in the business, both financially and in terms of labor and skills. The liability of each partner depends on his percentage of the investment. Partners may be exempt from debt that other partners accrue. This structure is popular with partners in professional fields such as accounting or law.

3) Joint Ventures:

These are most often used when the business will undertake just one single project, or will be a temporary endeavor. The business structure can later be changed into an ongoing partnership.

Corporation

Corporations are more complicated business structures. Here are some details about Corporations:

  • They are complicated, requiring much documentation and organization.
  • Corporations often retain attorneys to assist with paperwork and other legal issues.
  • Corporations protect shareholders from personal liability.
  • Shares of the corporation may be offered to the public, creating many shareholders.
  • Corporations are considered entities on their own.
  • Non-profits may be Corporations, as well as for-profit companies.

Limited Liability Corporation (LLC)

Limited Liability Corporations are a combination of Partnerships and Corporations:

  • An LLC may be owned by one or more people (some states have specific rules regarding the number of people allowed for an LLC)
  • Owners are not personally liable for the debts and losses of the business that are accrued by other partners.
  • The LLC is not taxed. Rather, each individual owner receives profits or pays losses, then reports that income or loss when he files with his personal federal income taxes.
  • Articles of Organization and an Operating Agreement spell out the details about how the company will be set up internally.

Companies in the banking and insurance industries may not use the LLC business structure.