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What are Various Business Structures and Which One is the Best?

So you have a brilliant business idea and the drive to make it a reality. After all, entrepreneurship is brimming with exciting possibilities. Recent data shows about 5.5 million businesses were created in the U.S. alone. However, you must select the right business structures before you launch your dream venture. This seemingly technical detail significantly affects how your business operates, is taxed, and manages its finances. Choosing the ideal structure can empower long-term success.

To help you out, we’ll explore seven business structures to help you determine which option best aligns with your entrepreneurial vision.

7 Top Business Structures

business-structures, small-business-coach

Entrepreneurship is thrilling, but choosing the right business structure can feel overwhelming. Here are the top 7 business structures to empower you with the knowledge to make an informed choice.

1. Sole Proprietorship

This is the simplest and most common structure where an individual owns and operates the business. It’s the perfect structure for solopreneurs like you. You have complete control of the business and enjoy all the profits. 

However, you also shoulder all the debts and legal liabilities. Setting up is a breeze, but there’s no separation between your personal and business assets.

2. Partnership

This business structure lets you partner with a trusted partner to own and run a business. You’ll split profits, losses, and management duties but enjoy the flexibility and combined expertise. 

The two main types to consider include:

  • General Partnership – All the partners have unlimited personal liability for business debts and lawsuits.
  • Limited Liability Partnership (LLP) – It’s similar to a general partnership but provides limited liability protection to partners. It’s an ideal structure often used by professional service firms, such as law and accounting practices.

The business tax ID or EIN tax ID number is your business taxpayer identification that needs to be obtained  from the local tax office. It helps you fill your business taxes in an easy way.

3. Limited Liability Company (LLC)

An LLC offers the best of both worlds: the flexibility of a partnership and the liability protection like a corporation. 

LLCs, like corporations, shield you – the members – from personal liability for business debts. They offer more management flexibility like partnerships and are taxed as pass-through entities. This means profits and losses flow directly through to your personal tax returns.

Not all businesses can be LLCs. Banks and insurance companies, for example, wouldn’t be a good fit for an LLC structure. 

These days, setting up an LLC is surprisingly simple, without mountains of paperwork.

4. Corporation

A corporation is created when an individual or a group of individuals – shareholders – with a common goal incorporates a business. 

Also known as “separate persons,” a corporation is a separate legal entity from its owners. While you’ll benefit from the business’s stocks and dividends, you can’t be held responsible for its debts. If you leave or sell your shares, the business will continue running without any hiccups. 

A corporation can do many things that people can, like signing contracts, borrowing money, or even getting sued.

  • C Corporation – This is the most common type of corporation. It experiences double taxation, meaning the corporation pays tax on profits, and then you pay taxes again on the dividends you receive.
  • Benefit Corporation – A relatively new option for businesses that want to make a social and environmental impact alongside profit. These businesses care as much about doing good for the world as they do about making money. 

Benefit corporations meet specific legal requirements and hold themselves accountable to a higher social purpose.

  • S Corporation – Think of it as a small business version of a regular S corporation. It also protects you from personal liability but with a tax advantage. 

Profits and some losses go straight to your tax returns, avoiding double taxation.

5. Cooperative

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This is a business democratically controlled and owned by its members. It gives you and other members a say in how it’s run. 

Unlike traditional businesses that distribute profits to shareholders, cooperatives follow patronage allocation. This system allocates profits based on members’ patronage, rewarding you for your involvement with the cooperative. You can be rewarded as refunds, retained equity, or both. 

This structure is popular in the housing, agriculture, and consumer goods sectors.  

6. Franchise

A franchise is a license you – the franchisee – get from another business – a franchisor – authorizing you to use their name, brand, and business processes.

It’s like a shortcut to opening your own business.

In return, you benefit from an established brand and proven business model. It’s a good option to be your own boss without the hassle of starting a business from scratch.

7. Nonprofit Organization

A nonprofit organization is ideal for charitable, educational, religious, or scientific purposes. Besides operating within specific regulations, you must apply for tax-exempt status as nonprofits don’t distribute profits to owners.

Additionally, it’s important you maintain meticulous records and file additional paperwork to maintain the business’s tax-exempt status.

Which Business Structures are the Best?

There’s no magic bullet here. The best structure depends on several factors specific to your unique venture, such as:

  • Liability – Do you want to shield your personal assets from business debts?
  • Taxation – Understanding how government bodies tax profits and losses is crucial. Is it pass-through or double taxation?
  • Ownership structure – Are you a solopreneur, or will you have partners?
  • Growth potential – Does your business plan involve raising capital through investors in the future?
  • Ease of formation and flexibility – How quickly do you need to get started, and how much flexibility do you need?

Conclusion on Business Structures

Choosing the right business structure is a critical first step in building a successful and sustainable enterprise. Understanding these structures can help you make an informed choice.

So, explore your options, seek expert advice, and confidently build your dream business.

Author Bio:

Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.