Overview of Business Structures
Your business structure determines three critical things.
First, it affects how much personal liability you have.
Second, it determines how your business is taxed.
Third, it dictates how your business is managed and governed.
Here is a breakdown of every major business entity type available in the US.
Sole Proprietorship
The simplest business structure. You and the business are legally the same entity.
Advantages
- + No formation paperwork needed
- + Complete control over the business
- + Simple tax filing on personal return
- + Lowest startup cost
Disadvantages
- - No personal liability protection
- - Harder to raise capital
- - Business ends when owner dies
- - All income subject to self-employment tax
Limited Liability Company (LLC)
A flexible structure that combines liability protection with simple management. The most popular choice for small businesses.
Advantages
- + Personal liability protection
- + Pass-through taxation
- + Flexible management structure
- + Few ongoing formalities
Disadvantages
- - Self-employment taxes on profits
- - Cannot issue stock
- - harder to raise venture capital
- - varies by state in formation rules
C Corporation
A separate legal entity owned by shareholders. The standard structure for large companies.
Advantages
- + Strong liability protection
- + Can issue stock to raise capital
- + Unlimited number of shareholders
- + Perpetual existence
Disadvantages
- - Double taxation on dividends
- - More paperwork and formalities
- - More expensive to form and maintain
- - Required annual meetings and minutes
S Corporation
Not a separate entity type, but a tax election. Both LLCs and C-Corps can elect S-Corp tax status.
Advantages
- + Avoids double taxation
- + Can reduce self-employment taxes
- + Liability protection
- + Pass-through income to shareholders
Disadvantages
- - Limited to 100 shareholders
- - Only one class of stock allowed
- - Shareholders must be US citizens or residents
- - Must pay reasonable salary to owner-employees
General Partnership
A business owned by two or more people. Partners share profits, losses, and management duties.
Advantages
- + Easy to form (can be verbal agreement)
- + Pass-through taxation
- + shared management responsibilities
- + low cost to start
Disadvantages
- - No personal liability protection
- - Each partner liable for others' actions
- - Disputes can be hard to resolve
- - Dissolves when a partner leaves (unless agreed otherwise)
Limited Partnership (LP)
A partnership with two types of partners: general partners (who manage) and limited partners (who invest).
Advantages
- + Limited partners have liability protection
- + Good for raising capital from investors
- + Pass-through taxation
- + Clear separation of management and investment
Disadvantages
- - General partners have unlimited liability
- - More complex to form
- - Must file with the state
- - Limited partners cannot participate in management
Limited Liability Partnership (LLP)
Similar to a general partnership, but each partner has limited liability for the others' actions.
Advantages
- + Liability protection for all partners
- + Pass-through taxation
- + Flexible management
- + Partners not liable for each other's negligence
Disadvantages
- - Not available in all states
- - Limited to professional service firms in some states
- - Must file with the state
- - Annual reporting requirements
Nonprofit Corporation
A corporation formed for charitable, educational, religious, or scientific purposes. Profits go back into the mission.
Advantages
- + Tax-exempt status (501(c)(3))
- + Can receive tax-deductible donations
- + Liability protection for directors
- + eligible for grants
Disadvantages
- - Cannot distribute profits to members
- - Extensive paperwork to get and maintain tax-exempt status
- - Subject to public reporting requirements
- - Restrictions on political activities
Quick Comparison Table
| Type | Liability Protection | Taxation | Complexity |
|---|---|---|---|
| Sole Proprietorship | None | Personal | Very Low |
| LLC | Yes | Pass-through | Low |
| C Corporation | Yes | Double (corporate + personal) | High |
| S Corporation | Yes | Pass-through | Medium |
| General Partnership | None | Pass-through | Very Low |
| Limited Partnership | Limited partners only | Pass-through | Medium |
| LLP | Yes | Pass-through | Medium |
| Nonprofit | Yes | Tax-exempt | High |