Different Types of Business Structures to Consider For a New Business

If you're starting a small business or an existing business owner experiencing high levels of growth, one of the decisions you'll need to make is the type of business structure to choose. There are several different options, each with its pros and cons. In this guide, we'll review the different types of business structures and help you decide which is right for your new small business.

What are the Different Types of Business Structures to Choose From?

The type of structure you choose for your small business will influence how it works, its potential growth, and how you are taxed. There are four main types of small business structures, each with its advantages.

Sole Proprietorship

A sole proprietorship is an attractive choice for small businesses as it's straightforward to set up and has minimal paperwork requirements. Furthermore, there are no costly setups or ongoing fees associated with this structure.

When you are thinking about starting a small business, it often begins with choosing the right business structure. A sole proprietorship is a popular and positive choice for many. This structure grants owners complete control over their vision and decisions and streamlines administrative and tax burdens.

Compared to other, more complex business structures, establishing a sole proprietorship is relatively simple, often making it a go-to choice for aspiring business owners striving for independence.

Furthermore, it fosters a strong sense of responsibility and pride in one's work while allowing the business to flourish, bringing success and rewards to the one who dreamt it all. Embracing this popular business structure can set entrepreneurs on a path of growth, learning, and success.

Steps to Start A Sole Proprietorship

1. Decide on a Business Name
2. Research state and federal laws regarding sole proprietorships
3. Obtain an Employer Identification Number (EIN) from the IRS
4. Open a business bank account and obtain the necessary licenses and permits
5. Track all income and expenses for tax purposes.
6. Buy and Register a Domain Name
   

Related Reading: Do You Need a Business Bank Account as a Sole Proprietor?

Partnership

For small businesses with multiple owners, a partnership can be a viable option since it offers flexibility in sharing responsibilities and profits among members.

Entering into a partnership can be rewarding, as it combines multiple individuals' strengths, expertise, and resources to create a strong foundation for business growth. This business structure can lead to productive collaborations and smoother decision-making processes as partners share responsibilities, risks, and benefits in a balanced way. A successful partnership benefits from the diversity of skills, knowledge, and networks each partner brings to the table, creating a synergy that enhances the business's overall performance.

Furthermore, a partnership's connection and mutual support can foster creativity, innovation, and resilience in the face of challenges as partners work together to propel their businesses forward. Finally, a thriving partnership paves the way for financial success and business expansion. It cultivates an environment of shared values, trust, and commitment.

Steps To Start A Partnership

1. Identify your business partners
2. Decide which type of partnership best meets your needs 
3. Brainstorm and choose a fitting name for your business partnership
4. Legally register the partnership with the appropriate government agencies 
5. Calculate and determine any necessary tax obligations 
6. Apply for an Employer Identification Number (EIN) and other relevant tax identification numbers 
7. Create a detailed, legally-binding agreement that outlines the responsibilities, rights, and expectations of all parties involved in the partnership

Related Reading: Commonly Asked Questions About EINs

Limited Liability Corporation

A limited liability company (LLC) is a common business structure among small businesses and entrepreneurs. An LLC offers the limited liability protection of a corporation but can be structured in many different ways, making it highly customizable.

LLCs are simple to set up and maintain, as they have fewer formalities than corporations. Additionally, an LLC can be owned by any number of members, whether individuals or other entities like corporations or partnerships.

Also, LLCs offer the ability to pass through profits and losses to their owners without taxation at the entity level, allowing for more efficient tax planning for the business members.

Steps To Start An LLC

1. Confirm Business Name
2. Establish the LLC - Register With Your State
3. Create an LLC Operating Agreement
4. Obtain an EIN for your LLC
5. Open a new business bank account for your LLC
6. Obtain the necessary licenses and permits for your LLC
   

Corporation

A corporation, or C Corporation, is a business structure that is the most common type of legal structure for businesses. It gives its owner's liability protection, can go public and offer stock options, has variable tax rates and deductions, and has significant flexibility regarding ownership and management.

A C Corporation also allows for multiple classes of shares with various dividend rights, voting rights, etc. The downside is that they are subject to double taxation – meaning corporate income is taxed once at the corporate level and again when dividends are paid to shareholders. For this reason, some entrepreneurs may opt to form different types of entities, such as an LLC or an S Corporation.

Steps To Start A C Corporation

1. Confirm Business Name
2. Appoint officers to the corporation (CEO, board of directors)
3. Register with your State
4. Write company bylaws
5. Issue stock
6. Apply for a business license at the state, county, and municipal levels
7. Obtain an EIN
8. Apply for any other ID numbers required by state and local governments, such as for unemployment and disability insurance

S Corporation

An S Corporation, or "S Corp," is a corporate business structure that provides tax benefits to small businesses while providing limited liability protection. Unlike traditional C-Corporations, S Corps are not taxed on profits; shareholders are responsible for paying taxes. This is done separately through personal income tax returns. As such, the profits and losses of an S Corp "pass-through" to each shareholder who reports it on their tax return. 

Related Reading: How Your Business Structure Impacts Your Taxes

The advantages of setting up an S Corp include the following:

• Avoiding double taxation
• Having flexible ownership structures
• Transferring ownership quickly
• Having access to more favorable tax laws

The main disadvantage is that there are restrictions on the type of business owners eligible for this structure. For example, an S Corp must have fewer than 100 shareholders, and all must be US citizens or residents; additionally, all shares must be equal in value and distributed among the same class of stockholders. Further, suppose an owner earns wages from working in the company. In that case, payroll taxes will still be due on those earnings.

Steps To Start A S Corporation

1. Confirm Business Name
2. File articles of incorporation
3. Register with your State
4. Write company bylaws
5. Issue stock
6. Apply for a business license at the state, county, and municipal levels.
7. Obtain an EIN
8. Apply for any other ID numbers required by state and local governments, such as for unemployment and disability insurance

Chose the Right Business Structure

Researching the different types of business structures is essential to starting a successful business. It is crucial to find the proper structure for your business and yourself, as it will impact various factors, such as taxation, legal liability, and how you can raise capital. Knowing all the options available for forming a business will enable you to decide which type would be best for your circumstances.

Many types of businesses are available, from limited liability companies (LLCs) and sole proprietorships to corporations and partnerships. Each type has advantages and disadvantages that must be weighed carefully before deciding.

Related Reading: Which Business Structure is Best for my Small Business?