Forming a Business? Check Out These 5 Types of Business Structures Before Launching
The first step to take before launching any business is to ask, “What type of business structure should I start or form?”. There are 5 main types of business structures out there for all you small business owners and wantrepreneurs. It’s important that you choose the right one because they have different tax and financial considerations. There are also different laws that govern the different types of business structures. The one you pick will shape your entrepreneurial journey moving forward.
Different Types of Business Structures
Fundera defines “small business” as a “business with a maximum of 250 employees or a maximum of 1,500 employees. They’re privately owned corporations, partnerships, or sole proprietorships that have less revenue than larger businesses.”
About 35% of small businesses are LLCs, while 33% are S-corporations, 19% are C-corporations, 12% are sole proprietorships, and 2% are general partnerships. We are covering 5 types of business structures that you can launch your biz as, including:
- General Partnership
- Limited Liability Company (LLC)
- Sole Proprietorship
Read on as we break them down:
We define a C-corporation as a “company or group of individuals that has declared itself (through the process of incorporation) an independent legal entity overseen by a board of directors.”
This definition also means that a C-corporation is a type of business that is separate from its owners. A C-corporation essentially has the same rights as an individual because it can enter contracts, take legal action, be sued, loan and borrow money, pay taxes, and hire employees.
We define S-corporation as “a form of business incorporation, also known as “Subchapter S,” which can elect to pass corporate income, deductions, and losses to shareholders for federal income tax purposes.”
An S-corporation is different from a C-corporation because of taxes. The owners can pass on the profits and losses to the business’ shareholders. However, a C-corporation gives you more freedom when selling shares of your stock. Read more about their differences here.
Click on this link to learn how to open an S-corporation.
Our definition of a general partnership is “a mutual understanding through which two or more people share in all profits, assets, and liabilities of a company.” Both parties agree to unlimited liability if they enter this partnership. That means that either of their personal assets could be on the hook to cover the partnership’s financial and legal obligations.
With general partnerships, the owners can run their business with less constraints than a C-corporation. They can control their operations more closely and to their liking because they have less bureaucracy to deal with.
If you need some guidance on how to start a general partnership, here’s how you do it in 7 steps.
Limited Liability Company (LLC)
Another common type of business is an LLC, which we define as “an organization within which the members of a business cannot be held liable for its debts, combining the characteristics of a corporation and a partnership.”
An LLC is similar to a partnership, but it’s more formal because you need to file articles of organization that a partnership does not require. LLCs also don’t pay taxes directly. Instead, taxes from earnings are losses paid on the personal tax returns of the owner.
Learn more about creating creating your LLC right now.
A sole proprietorship is run by a sole proprietor, who is “also known as a sole trader, this is the owner of a type of business where that person accrues all of the business’ profits, debts, losses, and liabilities. The business is known as a sole proprietorship.
It is the most common (and simplest) way to structure your business. In some cases, you do not need to take formal action to start a sole proprietorship. You may already be a sole proprietor without knowing it if you’re running any operations where money is exchanged. However, you still need to comply with local permits, licenses, and registrations.
Here’s what you need to know if you want to start a sole proprietorship.
The life of a small business owner can be full of trials and adventures, and the type of business structure you choose may affect what those are. Each one comes with its own set of challenges and benefits, so we encourage you to consider your options carefully before making a choice. In any choice you make, you’ll need a business bank account to make sure all your finances are organized.