The most common differences in business structures are ownership, liability and tax considerations. When it comes to liability, it’s important to consider where you, as an owner, could personally afford liability risks. Protecting personal assets is a key reason people incorporate their business, and while some structures are easier to form than others, it can be difficult to change your entity’s structure down the line, so avoid restricting your business’s ability to grow in your selection.
Sole Proprietorship: Sole proprietorships are simplest to form, and if you don’t register your business as another entity, you’ll automatically be considered a sole proprietorship. Owned by one individual, this structure comes with the greatest personal liability. As the business grows, your personal liability will increase. Therefore, this structure is best for lower risk businesses. Also consider that it is difficult to obtain outside funding for sole proprietorships.
Partnerships: Partnerships are owned by two or more people. The partners will share in any profits, losses and decision-making responsibilities. These entities require an operating agreement that outlines the roles of its owners and the percentage of profits they each receive. Consider that you will be held liable for both decisions you make, and those made by other owners. Funding for these entities will generally come from the personal accounts of its owners, their personal credit or by taking on more partners.
Limited Liability Company (LLC): Forming an LLC protects you from personal liability if you don’t act in a manner that is in any way illegal, unethical or irresponsible when carrying out business activities. Personal assets and company assets are deemed separate under this entity. This structure is great for medium-high risk businesses and owners with a lot of personal assets they want to protect.
Corporation: Incorporating your business makes it a separate entity from its owners. That entity can be sued, own and sell property, and sell ownership rights in the form of stocks. No individual owner has sole or primary control. Instead, most corporations have a Board of Directors to answer to. More specifics apply depending on the type of corporation…
C Corp: C-corps are ideal for medium-high risk businesses, businesses that need to raise outside funds and businesses that intend to go public or eventually be sold. As you can see, forecasting where you would like to see your business go or grow into, is important to many of these considerations.
S Corp: S-Corps are intended for smaller corporations. There can be no more than 100 owners, and all must be United States citizens.
B Corp: B-Corps differ from other types of corporation in purpose, accountability and transparency. In some states, B-Corps are required to submit annual benefit reports to demonstrate that they are indeed contributing to the public good.
For a more simplified depiction of this breakdown, reference the following table:
|Sole proprietorship||One person||Unlimited personal liability||Personal tax only|
|Partnerships||Two or more people||Unlimited personal liability unless structured as a limited partnership||Self-employment tax (except for limited partners)
|Limited liability company (LLC)||One or more people||Owners are not personally liable||Self-employment tax
Personal tax or corporate tax
|Corporation – C corp||One or more people||Owners are not personally liable||Corporate tax|
|Corporation – S corp||One or more people, but no more than 100, and all must be U.S. citizens||Owners are not personally liable||Personal tax|
|Corporation – B corp||One or more people||Owners are not personally liable||Corporate tax|
|Corporation – Nonprofit||One or more people||Owners are not personally liable||Tax-exempt, but corporate profits can’t be distributed|
Later this week, we’ll delve into the tax differences and implications of each of these business structures.