There are many legal and tax implications surrounding the type of business structure you choose. Learn more about the different types and which one is best suited for you and your business. We highly recommend seeking guidance from a legal expert.
A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.
For more information on sole proprietorships, visit the Small Business Administration website.
A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.
For more information on LLCs, visit the Small Business Administration website.
A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners.
Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, although the number of shares they hold does not affect the weight of their vote.
Cooperatives are common in the health care, retail, agriculture, art and restaurant industries.
For more information on cooperatives, visit the Small Business Administration website.
A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders who own it, is held legally liable for the actions and debts the business incurs.
Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
For businesses in that position, corporations offer the ability to sell ownership shares in the business through stock offerings. “Going public” through an initial public offering (IPO) is a major selling point in attracting investment capital and high-quality employees.
For more information on corporations, visit the Small Business Administration website.
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
There are three general types of partnership arrangements:
For more information on partnerships, visit the Small Business Administration website.
An S corporation (also referred to as an S corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.
An S corp is a corporation with the Subchapter S designation from the IRS. What makes the S corp different from a C corporation is that profits and losses can pass through to your personal tax return. Consequently, the business itself is not taxed; only the shareholders are. There is an important caveat, however. Any shareholder who works for the company must pay him or herself "reasonable compensation." Basically, the shareholder must be paid fair market value, or the IRS might reclassify any additional corporate earnings as "wages."
To file as an S corporation, you first must file as a corporation. After you are considered a corporation, all shareholders must sign and file Form 2553 from the IRS to elect your corporation to become an S corporation.
After your business is registered, you must obtain business licenses and permits. Regulations vary by industry, state and locality. Refer to our Business License and Permit guide to learn more.
For more information on S corporations, visit the Small Business Administration website.