Business Structures 101: Explaining The Different Types
When you’re looking to start a business, there are an endless amount of questions to answer and issues to resolve.
One minute you’re looking for an investor and the next minute you’re outlining a marketing plan.
It doesn’t matter what kind of business you have, one thing is for certain: there is never a dull moment. Between meetings and making 100 calls, how could there be?
When it comes to small business legal matters, you may feel like you’re wading waist-high through mashed potatoes. Even though budget decisions and marketing plans aren’t the most thrilling subjects in the world, at least you can see your business coming together. It can definitely bring a bit of excitement as you realize that your dream is finally coming true.
Legal matters seem more like an obligation, like speaking to your great aunt on the phone when you’re 10-years old. You know you’re going to have to do it, but you really don’t want to. One of the most important parts of the legal process is determining the business structure.
In this article, we’re going to go over what business structure is and the different types that exist.
What is Business Structure?
Your business structure is the legal organization of your business. Depending on the business structure you choose, it will determine how you pay taxes, paperwork that needs to be filled out, investment means, and personal liability.
There are many factors that go into choosing a structure, such as size, type of business, and immediate circumstances.
You can reorganize your business structure later on if you choose to do so.
Types of Business Structures
There are multiple types of business structures for you to choose from. Some are more simple than others and some are newer as well. Ask any small business owner and you’re likely to hear a different answer each time. With around 30 million small businesses in the US alone, it can be hard to keep track of everyone’s answers.
Pretty easy to explain, a partnership is when two or more people come together in order to start and run a business. Both partners have an equal share in the business and both will report any income on their personal tax returns.
You pay self-employment tax while being liable for any debts or actions by your business partner. If you’re entering a partnership, make sure and have a written contract instead of a handshake agreement.
Limited Liability Company
You’re probably more used to its acronym, LLC. It’s a newer business structure because of its hybrid nature. They can either be run as corporations or partnerships, with a few differences between those. Corporations tend to be a bit more complex while the partnership angle runs similar to a regular partnership.
You’ll be protected from personal liability, meaning your personal assets won’t be at risk should the business face any legal issues. When you get your written LLC Operating Agreement it will protect a company’s limited liability status by proving that the LLC is a separate legal entity.
LLC members (owners) are also considered self-employed and must pay such taxes on their tax returns. Check out this LLC guide for all 50 states.
LLCs can be complicated, which is why it’s a good idea to turn to an LLC expert when starting your business.
The simplest and most common form of business structure, a sole proprietorship is where you and you alone are the owners. You’ll have complete control over your business.
Being a sole proprietor means that you’re not producing a separate entity and your business assets and liabilities are tied in with your personal assets and liabilities. If your company goes under, your personal effects will bear the cost.
As a sole proprietor, it can be hard to receive money as you can’t sell stock and many banks balk at lending to sole proprietors. They are, however, considered lower risk than the other types as many business owners are simply testing the waters.
By far the most complex of all business structures, a corporation is large and can sell stock in order to raise money. Being completely independent, the corporation is responsible for its actions and debts.
Corporations can also vary by state, being regulated and managed by different business and tax laws. Taxes are completely different here, with owners being taxed at an individual tax rate while the corporation is hit with the corporate tax.
There are also different kinds of corporations: C corp, S corp, B corp, Close corp, and a Nonprofit corp. The most common of the group are the C and S corp.
C corp is a legal entity that remains separate from its owners while S corp blurs that line a bit more, allowing business losses and profits to be passed to their owners’ personal income.