One of the most important decisions you’ll make when starting a business is what type of business structure to choose. The right business structure for your organization will depend on a number of factors that are specific to your products or services, your customers or clients, and your future growth plans. Common Business Structures You May Select The framework you choose to structure your business will be based on how many people are involved in the operation of the organization, your assets, and regulatory issues you want to address. Here are some common types of businesses that people select for their organizations: Sole Proprietorship This business structure works for companies owned by one person. While a single person operates it, the organization is considered a separate entity from the individual. This can protect the owner from certain liabilities and losses. A sole proprietorship is easy to register and license, where necessary. General Partnership This is a basic business structure in which more than one person owns the company. It allows multiple people to make claims to assets. However, partners can be liable for the debts of other partners, leaving people open to unnecessary liability. Despite the downfalls, this type of partnership is generally easy to register and manage. Limited Partnership This business structure typically has more registration and taxation requirements than a general partnership. It is a more complicated and rigorous structure, but offers partners protection from some of the liabilities of others who might take advantage of business assets. Family limited partnerships (FLPs) are a special type of limited partnership where family members are partners who own and manage the company. Limited Liability Company (LLC) A limited liability company, also called an “LLC,” is one of the most popular types of business structures in the United States. It is a hybrid between a general partnership and a corporation and allows great flexibility with taxation and financial organization. Businesses must follow state regulations for LLC formation and operation, but they require less paperwork than a corporation. LLC business structures are perfect for many small businesses. Corporation A corporation is an entity that is entirely separate from its owners. They are a preferred business structure for outside investors. Stockholders typically own shares of a corporation and have limited liability and limited control over the corporation. A board of directors handles activities of the business and hires leadership. S-Corp An S-Corp is a type of corporation that is taxed like a partnership, but it has limited liability benefits like a corporation. Shareholders are owners and experience profits and losses from the organization. There are strict limitations on the number of characteristics of shareholders. There are specific regulations required to register a subchapter S-Corp. C-Corp A C-Corp is similar to an S-Corp, but there can be unlimited stockholders. Additionally, C-Corps pay corporate income taxes, unlike S-Corps. C-Corps work well for very large organizations or those that expect to grow quickly. Consider How Your Business Structure Will Affect Taxes When deciding which business structure is right for you, taxes should be a major consideration. Each type of business structure has significant consequences on your taxes. Sole Proprietorship Taxes A self-employed individual is automatically considered a sole proprietor, and their taxes are assessed as those of an individual. There is no distinction between individual income taxes and those for a sole proprietorship. Limited Liability Corporation Taxes An LLC is a business structure, but not a tax designation. When you establish an LLC, you will choose how to be taxed by the Internal Revenue Service (IRS)—as a sole proprietor, a partnership, or a corporation. Corporation Taxes Corporations, including C-Corps, are required to pay corporate taxes. In some cases, this can lead to double taxation. For example, the owner of a C-Corp must pay personal income taxes, as well as corporate taxes. However, the benefits of this type of structure can outweigh the drawbacks in some cases. Considering Personal Liability And Business Structure Each business structure has varying levels of personal liability for debts, bankruptcy, and other financial aspects of an organization. Personal Liability In A Sole Proprietorship A sole proprietorship is treated as the individual, and the owner is completely liable for all debts. That means if the organization files bankruptcy, then the owner and their personal assets are on the hook as well. Personal Liability With Partnerships A partnership doesn’t give individuals much more protection. In fact, if one partner squanders assets of a general partnership, then the other partners may be held responsible as well. A limited liability partnership offers more protection to owners. Individuals are not personally liable for debts and bankruptcies. Instead, the organization itself may be forced to go out of business if there are not enough assets to cover debts. Personal Liability In Corporations A corporation and similar business structures passes the profits and losses to shareholders. However, shareholders are not responsible for bankruptcies. They may lose their investment, but creditors cannot typically “pierce the corporate veil” and recover debts from shareholders or leaders within the corporation. There is a lot of protection from personal liability built into the corporate organizational structure. Considering Future Growth Plans You’ll also want to consider the future growth plans of your business when choosing the type of business structure for your organization. Sole proprietorships and general partnerships often remain small. LLCs are also well-suited for small businesses. The limitations on these types of organizations are related to how leadership is structured and ability to obtain capital. Corporations work well for businesses that plan to grow large, as they offer more flexibility to raise capital easily. They are often viewed as a more established and professional organization with shared interests. Consider Multiple Factors When Deciding A Type Of Business Structure There are several factors that you should consider when deciding which type of business structure is right for you. If you’re not sure which works best in your situation, you should consult with a business attorney or accountant. Once you decide on the right business structure and are ready to get started, apply for a small business loan at Lendio.