If you are starting a new business, perhaps one of the most important considerations of all is the business structure that you choose. The business structure of choice will determine exactly what your business looks like and how it is run.
When you’re first starting, it’s by far one of the most important decisions of all, and this is a decision you have to make before you start doing any kind of business.
Today’s article will describe exactly what a business structure is, what the different business structures are, how to choose the right one for you, and more. So, what business structure is best for you?
What Is A Business Structure?
To provide you with a basic definition of a business structure, this refers to the organizational and legal framework that a business entity adopts to conduct and operate all of its activities.
The choice of a specific business structure will have large implications on how a business is owned, taxed, managed, and held liable for its obligations and debts. As you’ll see below, there are a variety of common business structures that you can choose from.
Different Types of Business Structures
There are five main business structures for you to be aware of, so let’s take a quick look at each of them.
1. Sole Proprietorship
The sole proprietorship is the best type of business structure for those people who want to be their own bosses and who don’t want to be formally organized. Here, a single owner is in complete control, and being a sole proprietor indicates that there is no separation of business and personal assets.
Although this is okay for smaller businesses, it can become an issue as a business grows larger, as there is no legal distinction between the business and the owner.
The costs can vary greatly depending on what type of industry you are in, and your early expenses will consist of office space, equipment, taxes, fees, and other services that you require.
If you are a sole proprietor, taxes are filed under your own name, and you’re also liable for anything that happens to your company. Raising money can also be a challenge because you can’t sell stocks, plus banks generally don’t lend money to sole proprietors. Start your sole proprietorship in the USA right here!
Pros and Cons of Sole Proprietorship
| Pros | Cons |
| A sole proprietorship is very easy to set up. You can even work under your own name, and there’s little paperwork involved. | With a sole proprietorship, you are personally liable for everything that your business does. |
| If you have a sole proprietorship, you’re your own boss, and you don’t have to answer to anybody. | If something happens to you, the owner, it is likely the end of the company. |
| Although costs may vary, sole proprietorships are generally very cost-effective. | Finding capital to start and operate a sole proprietorship can be very difficult. |
| Another benefit is that because the business and the owner are the same, all income earned from the company is also income from the owner. This means that there is only a single income tax. | |
| Closing a sole proprietorship is just as easy as opening it. |
2. Partnership
We then have a partnership, which is defined as a business entity that has a minimum of two owners. There are general partnerships where everything is shared equally as well as limited partnerships, where one partner has control, and the others contribute to the business and receive a portion of the profits.
This is a great business structure for those who want to go into business with family, a single business partner, or with their friends. It allows everybody to share profits and for decisions to be made together. Here, all partners are held responsible for losses, decisions, profits, and more.
This is the type of business structure that is ideal for those who want to partner with somebody who has a bit of experience in the industry. That said, starting a partnership business is more costly than starting a sole proprietorship, because you’ll need to hire an attorney, at the very least. Just make sure that you choose a reliable partner.
Pros and Cons of Partnership
| Pros | Cons |
| Just like with the sole proprietorship, a partnership is fairly easy to set up and doesn’t require much paperwork. | The big issue with partnerships is that taxation can be more costly. |
| Partnerships have good growth potential because it’s much easier to find money, especially from banks. Banks are more inclined to provide loans and lines of credit to partnerships than to sole proprietors. | Disagreements can also happen in partnerships. It can lead to friends and family quickly becoming enemies. |
| Having a partnership business also provides you with the opportunity to share the workload, so you don’t have to do everything on your own. This also allows for a division of labor in terms of skill. | All of the profits are shared, which means that you don’t get to keep 100% of them. |
| Starting a partnership business also allows you to share the costs with someone else. |
3. Limited Liability Company (LLC)
We then have an LLC or limited liability company. This is a hybrid business structure that allows partners and owners to limit their personal liabilities.
Here, you get the advantages of a sole proprietorship or partnership in terms of taxation and flexibility, along with the benefits of legal protection afforded by a corporation.
Here, all members are protected from personal liability as it is the company that is seen as a separate entity, and therefore individually liable. If you want to benefit from tax savings without dealing with a complex corporate structure, then this is a great business structure for you. Register your USA LLC here.
Pros and Cons of LLC
| Pros | Cons |
| All members of the company are legally protected, as their personal and business assets are distinguished between. | An LLC does not feature any stocks, so raising capital can be very difficult. |
| This type of business structure also allows you to choose how you are taxed, with a big benefit being that an LLC does not pay corporate taxes on profits. | An LLC has to renew its license every year, and this can be extremely expensive. |
| All profits and losses can be adjusted between all business members. |
4. Corporation
The fourth main type of business structure to be aware of is a corporation. A corporation is defined as an entity that is 100% completely separate from the business owners.
A corporation features its own legal rights. This in turn means that instead of the business owners being liable, it is the corporation itself. The corporation can sell or own property, it can sue or be sued, and so on and so forth.
There are then also various types of corporations to be aware of:
- An S-Corp is ideal for small businesses that want to avoid double taxation. Here, owners have limited liability protection. Profits and losses can in some cases pass through the owner’s personal income without being taxed.
- A C-Corp is a type of corporation that is taxed as a totally separate entity and is owned by shareholders. There is an unlimited number of investors possible. This type of corporation pays an income tax on its profits, and profits may even be taxed twice.
- A B-Corp is also known as a benefit corporation. This is the type of corporation that is structured to make a specific impact on society, and are usually advocates for some kind of positive change, such as for domestic violence, climate change, or anything else of the sort.
- A Closed Corporation is run by just a few shareholders and generally does not have a board of directors. This type of corporation does not benefit from limited liability protection. This is generally referred to as a privately held company.
Pros and Cons of Corporation
| Pros | Cons |
| Corporations offer the business owners fantastic liability protection. Owners are not personally responsible for legal or financial obligations of the company. | Creating a corporation requires a good deal of time and a very long application process. |
| Most types of corporations can sell ownership on the stock market, which makes it easy to get funding. | Corporations are subject to many regulations and rules that are required to maintain a corporate status. |
| Most types of corporations feature great tax benefits. | Corporations are extremely expensive to operate and to form. |
5. Non-Profit Organization
The fifth most common type of business structure is the nonprofit or nonprofit organization. This is a type of company that focuses on doing something altruistic rather than making a profit, and in essence, is structured like a charitable organization.
A nonprofit organization is required to file with the Internal Revenue Service, but is then exempt from taxes period nonprofit organizations have special rules that they need to follow, particularly in regard to what they do with the money earned.
One of the biggest defining features of a nonprofit is that money cannot be distributed to members.
Pros and Cons of Non-Profit Organization
| Pros | Cons |
| This type of business structure is exempt from taxes. | This type of business requires a lot of money to get started. |
| Nonprofit organizations can get grants from the government, interested individuals, and from the private sector. | A nonprofit organization is just that, a business that does not produce a profit. |
| Owners of nonprofit organizations have the same kind of liability protection as owners of corporations. | Finding the money to fund these businesses and to continue operation is extremely difficult. |
How to Choose the Best Business Structure for You
To round things off, let’s take a quick look at some of the most important considerations that you need to keep in mind when choosing a business structure.
- Who will be in control of the business and are you willing to share control?
- Are you OK with having personal liability, or do you want the business to be liable in your place?
- How exactly will you be funding the business? Do you plan on getting investors or going to a bank for a loan?
- How complex is your business? The more complex your business is, the more complex the structure will be.
- Keep in mind that not all business structures can be transferred to other people in the event that you want to leave the business for your kids or someone else.
- Consider the tax structure as well, as not all business structures are taxed equally.
- Different business structures also require different startup costs and operating costs.
More: The Comprehensive Guide to Business Name Registration
Conclusion
Now that you know what the five main types of business structures are to choose from, you can make an informed decision as to which one is best for you.
Whether we are talking about a sole proprietorship, a partnership, an LLC, a corporation, or a nonprofit organization, they all have their advantages and drawbacks to consider.
More: How To Start A Business (2023): Guide For First-Time Entrepreneurs
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