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 different types of business structures will be a cornerstone of your success. 

Our guide features the nine most common business structures and provides 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 success.

Jump to:

• What is a business structure
• Why choosing the right business structure for your business is important
• Sole proprietorship
• Partnerships
• Limited liability company (LLC)
• When to change your business structure
• Choosing the right business structure for your goals
• Start your business with confidence

What is a business structure

A business structure is the legal framework that defines how your business operates. It affects your personal liability, how you pay taxes, and what paperwork you need to file. Choosing the right structure helps you stay compliant and manage your business more effectively.

Common business structures include:

• Sole proprietorship: owned by one person with no legal separation from the business
• Partnerships: owned by two or more people who share profits, losses, and liabilities
• LLC (Limited Liability Company): combines liability protection with flexible tax options
• Corporations (C Corp and S Corp): separate legal entities offering strong liability protection
• Nonprofits and benefit corporations: mission-driven organizations with special tax status

Each structure comes with trade-offs. Understanding how they work is key to making a smart, strategic decision.

Why choosing the right business structure for your business is important

Your business structure impacts nearly every part of your operations—from how you pay yourself to how much you owe in taxes. The right setup protects your personal assets, reduces liability, and can help you qualify for loans or investor funding.

It also influences how your business is perceived. For example, forming a corporation or LLC may signal professionalism to clients, lenders, and partners. On the other hand, starting with a sole proprietorship or partnership keeps things simple and cost-effective in the early stages.

As your business grows, your structure should grow with it. Taking the time to choose wisely now can save you from legal headaches and unnecessary tax burdens later.

Sole proprietorship

In a nutshell: The simplest way to start a business

Best for: Freelancers, consultants, independent contractors

Risk: Unlimited personal liability

A sole proprietorship is the easiest and most common business structure. You and your business are legally the same, meaning your personal assets are at risk if your business faces debt or legal issues. You’ll report taxable income and expenses on your personal tax return, but you won’t benefit from certain tax breaks available to corporations and LLCs.

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.

Partnerships

Partnerships let two or more people run a business together without forming a corporation. They’re simple to set up and offer flexibility in how profits, duties, and decision-making are divided. This structure works well when trust and collaboration are strong between partners.

General partnerships

In a nutshell: Shared responsibility, shared risk

Best for: Small businesses with co-founders, law firms

Risk: Unlimited liability for all partners

A general business partnership involves two or more people sharing ownership and management responsibilities. Like sole proprietors, 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.

Limited partnerships

In a nutshell: Investment-focused partnerships

Best for: Real estate investment partnerships, venture capital firms

Risk: General partners assume full liability

A limited partnership includes at least one general partner (who manages the business and has unlimited liability) and one or more limited partners (who invest but have 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.

Limited liability partnerships (LLP)

In a nutshell: Liability protection for all partners

Best for: Law firms, accounting firms, medical practices

Risk: State-specific regulations may vary

In a limited liability partnership (LLP), all partners have limited personal liability, meaning their personal assets are generally protected from business debts. This structure is common among 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.

Limited liability company (LLC)

In a nutshell: Flexibility with liability protection

Best for: Small businesses, startups, professional service companies

Risk: More administrative requirements than sole proprietorships

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).

C corporation

In a nutshell: Strong liability protection with double taxation

Best for: Large companies, businesses seeking venture capital

Risk: Double taxation and complex regulations

A corporation, on the other hand, is a legally separate entity from you as the business owner. 

A C corporation is a separate legal entity from its owners, providing strong liability protection. It can issue unlimited stock and attract investors, but profits are subject to double taxation—once at the corporate level and again on shareholders’ personal tax returns.

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.

S corporation

In a nutshell: Pass-through taxation with corporate benefits

Best for: Small businesses looking to avoid double taxation

Risk: Strict eligibility requirements, limited to 100 shareholders

An S Corporation avoids double taxation by passing profits directly to shareholders, who report them on personal tax returns. Owners can also receive a salary, reducing self-employment taxes.

Nonprofit corporation

Nonprofit corporation: Mission-driven, tax-exempt status

Best for: Charities, educational institutions, religious organizations

Risk: Must meet strict compliance and reporting requirements

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.

Benefit corporation

In a nutshell: Profit with a purpose

Best for: Businesses with social or environmental missions

Risk: Additional reporting requirements

A benefit corporation is a for-profit entity legally required to consider its impact on employees, customers, and the environment. While still earning profits, it prioritizes social and environmental responsibility.

Benefit corporations 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.

When to change your business structure

Your business structure may need to change as your company grows, financial goals shift, or legal and tax requirements evolve. Common reasons for restructuring include seeking liability protection, reducing tax burdens, or attracting investors.

Protect personal assets

As your business grows, so do your risks. Shifting from a sole proprietorship to an LLC or corporation can protect your personal assets from lawsuits or debts tied to the business. This limited liability shields your home, savings, and other property from business-related claims.

Save on taxes

Your current structure might be costing you more in taxes than necessary. Moving to an S corporation, for instance, can help you avoid double taxation or reduce self-employment tax. A tax advisor can help you weigh the pros and cons based on your revenue and expenses.

Attract investors

Investors typically prefer corporations because they offer stock options and a formal governance structure. If you’re planning to raise capital, switching to a C corporation might be the right move. It shows professionalism and scalability, which can boost investor confidence.

Simplify operations

Some structures make it easier to run and manage your business. If you’re juggling multiple partners or expanding to new states, an LLC or corporation may offer more flexibility and clarity. This can reduce confusion and support smoother day-to-day operations.

Meet legal or industry requirements

Certain industries or clients may require a specific structure. For example, government contracts or professional licenses might only be available to corporations or LLCs. Updating your structure can ensure you're eligible for new opportunities and stay compliant.

Choosing the right business structure for your goals

Selecting the best business structure depends on factors like liability protection, tax treatment, investment needs, and operational preferences. A sole proprietorship or partnership offers simplicity, while an LLC or corporation provides legal safeguards and funding opportunities.

Your choice should align with both your immediate needs and long-term growth strategy. 

1. Define your business goals

Start by clarifying what you want to achieve—whether it's protecting personal assets, minimizing taxes, or raising capital. Your goals will shape which structure supports your vision best, both now and in the future.

2. Evaluate liability risks

Consider the level of personal liability you're comfortable with. If your business involves financial risk or legal exposure, an LLC or corporation can offer protection that sole proprietorships and partnerships don’t.

3. Understand your tax options

Each structure is taxed differently. Sole proprietors and partnerships report income on personal tax returns, while corporations may face double taxation. Weigh the benefits of pass-through taxation versus corporate tax treatment with a tax advisor.

4. Consider your funding needs

If you plan to attract investors or secure loans, your structure matters. Corporations make it easier to issue stock, while lenders may prefer the stability of an LLC or incorporated business.

5. Think about management and operations

Some structures offer more flexibility in how you manage and operate your business. LLCs allow for informal management, while corporations require formal boards and bylaws. Choose a setup that matches your preferred style.

6. Plan for future growth

Your structure should support your growth goals. If you plan to expand into new markets, add partners, or sell the business, a scalable structure like an LLC or corporation may serve you better long term.

7. Get expert advice

Before finalizing your choice, talk to a legal or tax professional. They can explain how each option affects your specific situation and help ensure your structure aligns with your financial and operational plans.

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. You can optimize operational efficiency and maintain regulatory compliance by automating tasks such as tracking income and expenses, managing payroll, and generating financial reports.