The type of business entity you choose will impact various parts of your business, from how you're taxed to the amount of control you have as the owner. This choice can affect the day-to-day operations and your personal liability, making it one of the most important decisions when starting your business.
Unsure of which is right for your company? Here are the most common small business structures.
[Read: Getting Ready to Launch? How to Choose the Right Business Structure]
Sole proprietorship
This is one of the simplest and most common small business structures. You are automatically a sole proprietor if you’re involved in business transactions but aren’t attached to any other business entity.
- To consider: A sole proprietor is in charge of the entirety of the business, which is under their own name.
- Suitable for: those just starting out or low-risk businesses
Partnership
Partnerships are the simplest business structures between two or more people. The most common forms of this structure are:
General partnerships: the default for two or more people without a defined business structure. Each partner holds liability for the business.
Limited partnerships (LPs): consists of one main partner having unlimited liability and the other partners retaining limited liability.
Limited liability partnerships (LLPs): similar to LPs, however, limited liability is given to every partner in this structure. An LLP protects each partner from the others’ actions.
- To consider: LPs have limited say over the business. However, they are not as financially liable. The person with unlimited liability also has to pay self-employment taxes as well as the business’ taxes.
- Suitable for: Partners or groups wanting to test business ideas before creating a formal business structure
Corporation
A corporation is taxed and held liable for all of its actions, eliminating the personal liability of its owners. There are a few different types of corporations including C corporations, S corporations and B corporations. Each has their own unique structure to the standard corporation structure.
- To consider: Corporations require extensive record-keeping and higher costs.
- Suitable for: medium- to high-risk businesses and businesses looking to eventually be bought/sold, go public, or attempting to raise money
The type of business entity you choose will impact various parts of your business, from how you're taxed to the amount of control you have as the owner.
Limited liability company (LLC)
An LLC is the hybrid structure between a sole proprietorship and a corporation. The owners are not personally liable for the business. Additionally, profits and losses are directly added to personal income without corporate taxation.
- To consider: Members of LLCs must pay self-employment taxes. Additionally, LLCs in certain states could be dissolved if one or more members leaves the LLC.
- Suitable for: medium- to high-risk businesses and owners who want to protect their personal assets without being subject to corporate taxes
Cooperative
A cooperative (co-op) is a business owned by those who personally utilize the products or services the business has to offer. The profits and earnings are distributed among the members.
- To consider: Each owner has only one vote when it comes to business matters, regardless of their involvement or investment. Additionally, some co-ops have a set, limited distribution among members.
- Suitable for: those looking to have the benefits of group purchasing and equality among members with limited liability
Which is right for you?
According to the SBA, 86.4% of non-employer businesses are sole proprietorships, while 47.3% of small employer businesses are S Corps.
Here are some questions to ask yourself when deciding which structure best suits your business’s needs:
- Do you have a business partner?
- How important is limited liability to you?
- How do you wish to be taxed?
- How do you wish to pay yourself?
- How much control do you want over your business?
Choosing the best business entity for your small business can be challenging. However, becoming informed of each business entity type and asking powerful questions will assist you in making this important decision for the future of your small business.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
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