When you own a small business, one of your first decisions is choosing between different types of business structures. However, it can be hard to make this choice.

It is crucial to understand your options before choosing the business structure for your small business.

Types of Business Structures

Types of business structures

If you are a small business owner, you have to select a business structure that suits your business needs. 

This guide will discuss various types of business structures to help you decide which business structure is best for your business.

Sole Proprietorship

A sole proprietorship is the simplest and one of the most common types of business structures chosen to start a business. 

It’s an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities.

You don’t have to take any formal action to form a sole proprietorship. In fact, unless you file papers with your state government or local government authority (like your county clerk), you are automatically considered a sole proprietor if you do business on your own, even if you haven’t named your new company yet or decided on an official structure!

Related: Sole Proprietorship vs LLC

Partnership

If you want to start a business, but don’t want to go it alone, a partnership is an option worth considering. A partnership is a business that’s owned by two or more people. 

Partnerships are relatively easy and inexpensive to set up, and they offer owners the ability to share responsibilities as well as profits. However, there are some potential drawbacks to consider before deciding if this arrangement is right for you.

Partners in a partnership share profits and losses in proportion to each partner’s initial investment (or according to an agreed-upon formula). 

The upside of this arrangement: You’ll receive help managing the business and won’t bear all the risk yourself. The downside: You may have little control over how much money your partners decide to invest in the company, or how much time they put into it, and that could affect its success.

Corporation

A corporation is one of the most complex types of business structures, but it provides you with some significant benefits. Corporations are owned by shareholders, who own shares of stock in the company. Those shares can be sold to raise capital for the company. 

Corporations can raise larger sums of money than other business structures, and they enjoy a lot more legal protection from liabilities and debts. They can also issue different classes of stock, giving them more flexibility when raising capital or dealing out dividends (profits).

However, a corporation is subject to double taxation: first, on its income; second, on any profits paid out in dividends to shareholders. This makes them less profitable than other structures for smaller companies that don’t have many shareholders.

Must Read: C Corporation vs LLC

Limited Liability Company (LLC)

An LLC stands for Limited Liability Company, one of the most popular types of business structures in the United States. The LLC is a hybrid legal entity having certain characteristics of both a corporation and a partnership or sole proprietorship. 

While the limited liability feature is similar to that of a corporation, the availability of flow-through taxation to the members of an LLC is a feature of partnerships. 

An LLC may be classified for federal income tax purposes as either a partnership, corporation or an entity disregarded as separate from its owner by applying the rules in Regulations section 301.7701-3.

An LLC generally has at least two members and can be formed in any state. In some states, such as California, an LLC with only one member is allowed.

Learn More: LLC Taxes by State: Complete Guide in 2022

Limited Liability Partnership (LLP)

The limited liability partnership (LLP) is one of the best types of business structures that share many similarities with the limited liability company.

As with an LLC, the owners are known as partners and have limited personal liability for the debts and other obligations of the business. The assets of the LLP are protected from claims against the businesses because it is considered to be a distinct legal entity, separate from its owners.

An LLP is similar to an LLC in that both may offer their owners protection against personal liabilities for any debt or obligation incurred by the business. 

In addition, both share certain tax treatments; if you choose to have your LLP taxed as a pass-through entity, then none of your earnings will be subject to corporate income taxes (thereby saving you money).

Also like an LLC, there are no restrictions on who can own an interest in your LLP or what business activities they can engage in.

S Corporation

An S corporation, for United States federal income tax, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. 

In general, S corporations do not pay any income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. 

This allows S corporations to avoid double taxation on the corporate income. An S corporation is a special type of corporation designed to provide its owners with the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

Related: A Comprehensive Guide to Changing an LLC to S Corporation

Nonprofit

“Nonprofit” refers to the fact that these organizations are not permitted to distribute profits to owners or shareholders. Nonprofits are organized for a public or mutual benefit other than generating profit for owners or investors.

Nonprofits may be established to help fund a charitable cause, educational institution, religious organization, government entity, or other types of organization that exists for a purpose other than earning money. A nonprofit can raise money by soliciting donations and by receiving grants from the state, local, and federal governments as well as from private foundations and other entities.

The Internal Revenue Service (IRS) allows some nonprofits to earn up to 20 percent of their annual revenue from unrelated business income (income earned through activities unrelated to the stated purpose of the nonprofit). 

For example, if a nonprofit operates an after-school program for at-risk youth and also owns an auto repair shop on the same property, it can include income earned from this activity when calculating its 20 percent limit.

Which is the Best Business Structure for Small Businesses?

Choosing the right type of business structure for your small business is an important decision to make. 

A business’s structure is one of the major determining factors when it comes to legalities, liabilities, and taxes. If you are ready to start a business, there are many factors that you should consider before making any decisions.

While there isn’t a one-size-fits-all solution, certain structures may be better suited for specific types of businesses or industries than others. You can either choose an existing structure or create your own custom entity depending on your unique needs and circumstances.

Sole Proprietorship: It is one of the simplest types of business structures for small businesses is a Sole Proprietorship as this type of entity doesn’t require much paperwork and is also inexpensive to set up compared to other entities such as Limited Liability Company (LLC) or Corporation. 

In this form, the owner has complete control over all aspects including finances but also assumes all risks associated with running the company without any liability protection offered by LLCs/Corporations like limited liability status which would protect personal assets from being at risk if things don’t go well financially or legally down the road due some unforeseen circumstance.

Limited Liability Company (LLC): An LLC offers more protection than a sole proprietorship because it provides limited liability status for its owners which means their personal assets aren’t at risk should anything happen financially or legally down the road such as getting sued by creditors after going bankrupt etc. 

However, this kind of entity does involve more paperwork and costs more money upfront when filing paperwork with state governments where these entities exist to obtain proper licensing so they can legally operate across states.

How Micahguru Formation can help

You’ve come to the right place if you’re thinking about forming an LLC with the help of a professional incorporation service.

Micahguru Formation is a U.S. incorporation company that helps founders and entrepreneurs globally to launch and manage their U.S. businesses remotely.

As a special thank you for reading our blog, we’d like to give you a discount on your purchase. Use the code (Blogreaders) when checking out and get your special discount.