Different Types of Business Structures

What are the different types of business structures?

As you may know, an LLC isn’t the only type of business structure you can choose from. Aside from LLCs, owners can choose from other types of business structures, including sole proprietorships, general partnerships, C Corporations, or S Corporations. Below, you’ll find information on how each of these business structures operates, starting with LLCs.

Limited Liability Company (LLC)

As we mentioned, an LLC integrates the structural models of both corporations and sole proprietorships/partnerships. They’re unique in that an LLC separates personal assets from business assets, which protects the owner, giving them more freedom and flexibility when it comes to choosing a tax structure and management plan.

• Ownership- LLC owners are called members. There can be single-member LLCs, LLCs owned by other corporations, or multiple members in charge of the LLC. There is no restriction to who can own an LLC, so foreign entities can participate as well.
• Formation- To form an LLC, an LLC Operating Agreement must be filled out, as well as all licenses, permits, and registrations required by the state they’re operating in. Additionally, the name of an LLC must be unique and cannot be in use in the state they are in. You can even form an LLC online using business creation services.
• Taxes- In the eyes of the IRS, an LLC isn’t a separate tax entity, so the business is not taxed. Instead, the federal government considers an LLC as a pass-through entity, requiring members (LLC owners) to pay through their personal income taxes. A benefit of an LLC is that members can choose the tax structure that meets their financial needs. This means they can be taxed as a corporation, partnership, or as part of the LLC’s member’s personal tax returns. Members can fill out IRS Tax Form 8832 to change filing status.
• Examples- YouTube, United States Postal Service, Chrysler are all examples of LLCs.

Sole Proprietorship

In a sole proprietorship, there is only one owner of the business. This business structure is the easiest structure to create, which can be highlighted by the fact that The Tax Foundation found there are 23 million sole proprietorships in the United States alone. This statistic is compared to the 1.7 million C corporations and 7.4 million partnerships and S corporations in the country. As the sole proprietor, you have lower startup costs and more freedom when it comes to making decisions for your business. However, you are completely liable for any debts or liability issues, which makes your personal assets vulnerable.

• Ownership- As the name says, there is only one sole owner in a sole proprietorship. As the sole owner, there is no distinction between the business and the individual. This means if your business faces bankruptcy or liabilities, your personal assets can be used as collateral and be taken away from you to settle tax and other debts.
• Formation- If you want to be a sole proprietor, all you must do to create a business is to obtain the right licenses, permits, and registrations required by your state. Like all businesses, however, it’s important you have a thorough business plan, enough funds, and small business grants to make a profit and be successful.
• Taxes- When Uncle Sam comes knocking at your door, you have to report your income, losses, and expenses on IRS Schedule C Form 1040.
• Examples- Restaurant owners, repairmen, childcare workers are often structured as sole proprietorship businesses.

General Partnership

A general partnership is similar to a sole proprietorship, however, the big difference is that two or more people share ownership of the company. Each owner is responsible for contributing equal amounts of labor, skill, and financial resources while sharing the profits and losses of the company. As a sole proprietor, all partners are responsible for debts and liabilities, leaving their personal assets at stake in case of a lawsuit or bankruptcy.

• Ownership- A general partnership requires an agreement, so there must be a minimum of two partners. Additionally, general partnerships can have as many owners as they want.
• Formation- Forming a general partnership is easy as a sole proprietorship and requires you to obtain the right licenses, permits, and regulations with the state. However, it is more expensive than a sole proprietorship and there is more legal work to complete because there is more than one owner.
• Taxes- When tax time comes around, general partnerships must file IRS Schedule K Form 1065 with the IRS. Each owner is responsible for taking care of their own taxes with their share of profits and losses recorded.
• Examples- Microsoft, Hewlett-Packard, Chanel are all recognizable examples of general partnerships.

C Corporation

A corporation, also called a C corporation or C corp, is a legal entity that is completely separate from its owners. Unlike the previous three business structures, C corporations differ in that they can be taxed, and the business is held legally liable for debts, bankruptcy, and any other liabilities. C corporations have the strongest protection for their owners but are much more expensive to create and require extensive recordkeeping and reporting. Additionally, C corporations can make a profit through stocks; unlike partnerships, sole proprietors, and LLCs.

• Ownership- C corporations have the ability to sell shares of the company in the form of a stock, giving shareholders a form of ownership. A corporation can have one shareholder or thousands—Google currently offers 19,605,052 shares in their C corporation. Because C corporations are considered a separate legal entities, shareholders technically aren’t legal owners because they can’t make business decisions.

Instead, an elected Board of Directors is responsible for making decisions. But, to be on the board, you are not required to own any shares. However, as a shareholder, the more shares you own the more “ownership” you have, which could give you more voting power when it’s time to make important decisions, such as voting on the Board of Directors.

• Formation- To form a C corporation, you must follow the standard process of applying with the state you’re operating in, and obtain the correct permits, registration, and licenses. C corporations are also required to file Articles of Incorporation with the Secretary of State.
• Taxes- C corporations differ from sole proprietors, general partnerships, and LLCs because they must pay an income tax on their profits. They can also be taxed a second time when dividends are paid to the company’s shareholders on their own personal tax returns. C corporations must file IRS Form 1120 when the time comes to pay taxes.
• Examples- Amazon, Google, ExxonMobil, Boeing are registered C corporations.

S Corporation

Last but not least are S corporations. The major advantage of an S corporation is that they can avoid the double taxation that C corporations face. With an S corp, profits and losses can be passed through to the owner’s personal income without having to face corporate tax rates. S corps have the same benefit of having an independent life like C corps and LLCs, leaving owners protected from liability issues such as bankruptcy and lawsuits.

• Ownership- An S corporation is similar to a C corporation in that shareholders are owners, with a Board of Directors making decisions. The only difference is that S corporations can only have a maximum of 100 shareholders, and all must be U.S. citizens.
• Formation- Forming an S corporation is also like forming a C corporation, with registrations, licenses, permits, and Articles of Incorporation being filed with your Secretary of State’s Office. However, S corporations must have all shareholders sign and file IRS Form 2553.
• Taxes- S corporations are beneficial in that they grant shareholders limited liability like C corporations and LLCs, but also allow you to pay income taxes similar to sole proprietorship and partnership business structures.

Examples- Fidelity Investments and Dell are S corporations.