Starting a new business can be challenging, and one of the most complex decisions you’ll have to make is what sort of business structure you want to be. With so many different types and so many things to consider, it can seem a daunting task, but this article will help you narrow down your choices, and this table is a handy tool as well.
The first and most common business structure is the sole proprietorship. This means the business has only one owner, but that owner is personally liable for any debts or bankruptcy of the business. On the bright side, they benefit from pass-through taxation, meaning that the company itself is not taxed, just the owner. This type of business is best for low-risk ventures.
Another type of business is a partnership, which is precisely what it sounds like: a partnership between two or more owners. The owners are still liable for the business (unless it’s a limited partnership), and they must file self-employment taxes as well as personal taxes.
Next is a corporation, which itself has multiple subtypes. A C corp has limited liability for owners, corporate taxes and can be formed by one or more people. An S corp has limited liability for owners, personal taxes and can be anywhere from one to one hundred people, all of whom must be U.S. citizens. A nonprofit corporation doesn’t have to pay taxes but can’t share profits, and the owners are not personally liable. Then there is the B corp, which is like a combination of C corp and nonprofit but is not recognized in all states.
Finally, the LLC, or limited liability company, is most commonly formed by a group of professionals like attorneys. It gives them liability protection without the drawback of double taxation. But, whenever there is a change of ownership, you must either dissolve or reform.