9 Types of business structures: How to pick the right one for you

Although small business owners say increasing revenue is their main goal in 2024, the business landscape is more competitive than ever.

As an entrepreneur navigating this dynamic environment, sifting through the types of business structures will be a cornerstone of your success. 

Our guide will illuminate the nine most common business structures, providing a comprehensive overview of their legal, tax, and liability implications. Whether you're a solopreneur or planning a larger enterprise, choosing the right structure is the first step to your success.

Jump to:

1. Sole Proprietorship
2. General Partnerships
3. Limited Partnerships
4. Limited Liability Partnerships (LLP)
5. Limited Liability Company (LLC)
6. C Corporation
7. S Corporation
8. Nonprofit corporation
9. Benefit corporation

Start your business with confidence

Types of business FAQ

1. Sole Proprietorship

Under the sole proprietorship structure, there is no legal difference between you as an individual and your business. All your business’s assets and liabilities exist under your own name, even if you file and operate under a fictitious business name (i.e., DBA or “Doing Business As” name).

So, a lawsuit facing your business could mean your personal assets will be at risk. This can include your:

• House
• Property
• Savings

You’ll be responsible for paying off the loan, even if your business can’t afford to. Taxes for a sole proprietorship will be reported on your personal income tax, and you won’t be able to take advantage of some of the tax incentives offered by other business structures.

By default, you start your business as a sole proprietor unless you file paperwork to choose a different business structure. Solopreneurs may find themselves choosing between a sole proprietorship and an LLC.

2. General Partnerships

A general business partnership involves two or more people sharing ownership and management responsibilities. Like sole proprietorships, general partners have unlimited personal liability for the business's debts. 

This means their personal assets can be at risk. Profits and losses are shared among the partners and reported on their individual tax returns. While partnerships can offer advantages like shared responsibilities and resources, the risk of personal liability is a major concern.

3. Limited Partnerships

A limited partnership combines elements of general and limited liability partnerships. There is at least one general partner with unlimited liability and one or more limited partners with limited liability. 

Limited partners are typically investors with no active role in management. Profits and losses are shared according to the partnership agreement. While limited partnerships provide liability protection for limited partners, general partners face significant risk.

4. Limited Liability Partnerships (LLP)

A Limited Liability Partnership (LLP) is a partnership where all partners have limited liability for the business's debts and obligations. This means their personal assets are generally protected. LLPs are often used by professionals like lawyers, doctors, and accountants. 

Profits and losses are typically reported on individual partner tax returns. LLPs offer liability protection, although they may have additional setup and maintenance requirements compared to other structures.

5. Limited Liability Company (LLC)

If you’re looking for something in between a sole proprietorship and a corporation, consider a limited liability company (LLC). In an LLC, your personal liability is limited, similar to that of a corporation, but there is less formality and paperwork than a corporation requires.

With an LLC, you have flexibility in how you will be taxed. For example, you can structure your LLC to be taxed as a C Corporation or, more commonly, as an S Corporation (where the business doesn’t file its own taxes).

6. C Corporation

A corporation, on the other hand, is a legally separate entity from you as the business owner. It is responsible for all of its own debts and liabilities, and you never have to use your personal assets to cover business obligations. This “corporate shield” protects your personal assets from being taken on behalf of the business.

Once you register your business as a corporation, you need to set up a formal structure consisting of:

• Shareholders: receive a portion of the company’s equity and also may be owners
• Directors: make strategic decisions through the Board of Directors
• Officers: manage the day-to-day activities of the company

If you plan to seek funding from venture capitalists, the corporation is the preferred business structure. Because your corporation is considered a separate entity from you, it will need a separate tax return.

One type of corporation is the C Corporation. C-corps offer limited liability protection but come with the added perk of being able to sell more than 100 shares of company stock. The main drawback is tax-related. Any profit made by a C-corp is taxed twice. Upon realizing the profit, a C-corp must pay taxes on it. When those profits are passed onto shareholders, the shareholders must pay an income tax on those same profits.

7. S Corporation

Many small businesses opt for the S Corporation, which does not file its own taxes. Instead, company profits are “passed through” and reported on your personal income tax return and those of other shareholders. As an S-corp owner, you are taxed on your respective shares of the company’s profits (and these profits are not subject to self-employment tax). You can also pay yourself a salary as an employee.

8. Nonprofit corporation

A nonprofit corporation is a legal entity formed to pursue a charitable, educational, religious, or other public benefit purpose without distributing profits to shareholders. These organizations rely on donations, grants, and earned income to sustain their operations. 

Nonprofits are exempt from federal income tax and may qualify for state and local tax exemptions, but they must adhere to strict nonprofit accounting guidelines regarding their mission and financial practices.

Governance is typically structured around a board of directors, which oversees the organization's operations and ensures alignment with its mission. While nonprofits can generate revenue through various activities, they have to reinvest any surplus funds back into their core purpose.

9. Benefit corporation

A benefit corporation is a for-profit entity that combines financial success with a positive social or environmental impact. Unlike traditional corporations, benefit corporations have a legal obligation to consider the impact of their decisions on employees, customers, communities, and the environment. They are subject to additional reporting requirements that measure their social and environmental performance.

While benefit corporations can distribute profits to shareholders, they prioritize their social or environmental mission. They are often certified by independent organizations to verify their commitment to public benefit. This legal structure appeals to socially conscious investors and consumers who seek to support businesses that align with their values.

Start your business with confidence

We strongly recommend consulting with legal and tax professionals to determine which business structure type is best for your specific business goals and circumstances.

After you make your selection, implementing accounting software can significantly enhance your financial management capabilities. By automating tasks such as tracking income and expenses, managing payroll, and generating financial reports, you can optimize operational efficiency and maintain regulatory compliance.