The type of business structure you choose for your company is an important decision that will affect day-to-day operations, so it’s essential to be well informed about the different types of business formations. Start with an informational guide (like this one!) and consulting a counselor, attorney, and accountant to further understand what’s best for your business.

Types of Business Formations

The form of business you decide on will determine your personal liability, personal tax returns, and your paperwork load, to name a few. Each form of business has their advantages and disadvantages, so think carefully consider each option since it impacts your business’s future. 

Sole Proprietorship

Sole proprietorship is the simplest form of business since one person is the sole owner, making it the least expensive to set up. The business owner is responsible for all of the profits and losses of the company and, since your company is not considered a business entity separate from you, there is limited liability protection, meaning that your personal assets can be taken to settle business debts. Additionally, your business income and expenses are reported with your individual income tax return.

A sole proprietorship can work best for low-risk, small businesses and for business owners wanting to give their business a test run before officially launching it.

Partnership

Partnerships are also fairly simple. The main difference is they operate with multiple business owners, instead of just one. There are two common types of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).

In limited partnerships, only one partner has unlimited liability while the others have limited liability. The one partner (with unlimited liability) pays self-employment taxes, but the other partners will have profits passed to personal tax returns. Meanwhile, in limited liability partnerships, every owner has limited liability, which protects them from business debts that other partners may have accumulated.

This arrangement may work out best for multiple business owners or a professional group with attorneys, as one example.

Limited Liability Company (LLC)

LLCs provide limited liability protection to the owners, meaning your personal assets are mostly protected against bankruptcy and lawsuits. The LLC will be responsible for business bank accounts and taking on debts rather than the business owners. They are considered self-employed, and must pay personal tax contributions to Medicare and Social Security. 

A limited liability company can be good for medium- to higher-risk businesses as well as for owners who want to protect personal assets or pay a lower tax rate than a corporation.

Corporation

When you’re set up as a corporation, your business is considered a separate entity from you and any other owners. This means you have liability protection against business debts and legal matters. It is the most formal and expensive way to structure your business, and you have to fill out paperwork with your state’s department of corporations. 

There are different types of corporations: C, S, B, closed, and nonprofit. C corporations have twice the amount of taxes since owners are taxed on their earnings while shareholders are taxed on their dividends. However, they also retain profits and losses. This setup is most beneficial to medium- to higher- risk businesses as well as companies that need to raise money or plan to eventually sell.

In an S corporation, profits and losses flow through the business to the owners, meaning it isn’t subject to corporate tax rates. It can be a good alternative to a C corporation, but there are specific criteria your business needs to meet to file as one.

With a B corporation, also known as a benefit corporation, there is a drive for profit and a mission to produce public benefit. An annual benefits report is usually required by some states for the business to show they contribute to public good.

A similar setup is a close corporation, but these typically have less traditional corporate structure. The rules vary from state to state, but their shares are typically barred from public trading.

Nonprofit corporations, as you might guess, work to benefit the public, and because of their purpose, they receive tax-exempt status. To get that status, they have to file with the IRS, which is different from other business structures, which register with their respective state. Organizational rules are similar to a C corporation, but they have to follow profit regulations.

Still Have Questions?

If you need more advice, you can find a wide range of industry experts and fellow business owners, who have been in a similar situation, on Cannon Connect. On our platform, we have forums to read what your peers have been through and a five-level system to build your company. Level 1 is the perfect place for you to find resources on how to make your “idea on a napkin” business a successful reality. You will get access to a wide range of benefits to support you and your business partners as well as events online to grow your professional network. Join a network of innovators on Cannon Connect today!

Brad True

Brad oversees all overall day-to-day operations of The Cannon and its growing community, including all current and future Cannon locations and Cannon Connect, The Cannon's new online platform. He holds an undergraduate degree in marketing from Texas A&M and a graduate degree from the University of Oklahoma.