Crystal Rae
Have you wanted to start a business but are afraid of choosing the wrong business structure? While it’s an important decision, there are business entity types for every business.
Don’t let your fear of selecting the wrong structure keep you from starting your business. Instead, learn more about the various structures and their pros and cons.
Read on for a basic overview of the most popular business entity types.
Sole Proprietorship
A sole proprietorship is the simplest and easiest business structure to start. It’s an excellent choice for individuals working for themselves without any employees.
You can start getting clients or selling products without legally filing for a business. Many freelancers and independent contractors operate as sole proprietors, and this structure works for businesses in many industries.
Writers, graphic designers, musicians, and other independent workers make great sole proprietors. However, you and your business have no separation in a sole proprietorship, so clients can go after your personal assets if they sue you.
General Partnership
A general partnership is similar to a sole proprietorship, but it involves two or more people. If you go into business with someone else, you can start working without filing for an LLC or corporation.
You’ll be able to take on clients or create products to sell, and you can have help from your business partner. However, it doesn’t separate you or your partners from the business.
And you can be liable for what your business partner does if they do something illegal. If you don’t have a partnership agreement, you also risk not being able to keep the business going if you disagree with your business partner.
Limited Partnership
A limited partnership is similar to a general partnership, but one of the partners may have less liability for business debt. It involves at least one general partner who runs the business and functions.
Other partners may be limited partners, so they don’t run the business daily. These partners aren’t as liable for the business as the partner who runs it daily.
Limited partnerships are good for business owners looking for investors. The investor can be a limited partner so that they own part of the business, but they don’t have to work in the business as much.
Limited Liability Company
A limited liability company (LLC) is one of the best entity types for business owners who want some protection. This business structure lets you separate the business from yourself, so people can’t sue your business and get your car or home.
While there is some paperwork and you will need to file for an LLC, it’s not as complex as a corporation. You can look at the costs and process to file for an LLC by state.
Then, you can receive similar protections as a corporation, but you don’t have to go through as much work to start the business. And you can start an LLC by yourself or with business partners.
C-Corporation
A C-corporation is a type of corporation where the owners are shareholders. Meanwhile, a board of directors and officers control the business.
Most C-corporations have multiple people to fill the various roles to own and run the company. However, you can do all of the work yourself and be a single-person C-corporation.
But a corporation involves more paperwork and planning. If you want the benefits of a corporation as an individual business owner, an LLC may be a better fit for you.
S-Corporation
S-corporations are similar to C-corporations, but you can pass taxes through the business. Because of that, you will include the business profits and losses on your personal tax return.
You also don’t have to worry about your personal assets because the business is separate from you. But it can take more time and money to form an S-corporation than simply starting a sole proprietorship or forming an LLC.
An S-corporation also needs to have bylaws and a board of directors. You have to follow many of the same regulations as a C-corporation.
Nonprofit
Another business entity to consider is a nonprofit. If you want to work as a charity, you can file for nonprofit status as a 501(c)3. A nonprofit can be a great structure for many organizations because it is tax-exempt.
However, you can’t use profits to benefit shareholders or other owners. You’ll need to use profits to benefit the people your group helps, whether that’s animals, children, or people with a specific medical condition.
If you start a nonprofit, you’ll need to follow the regulations closely. That way, you can maintain your status and keep helping people.
How to Choose a Business Structure
After you explore the basics of different business entity types, you should select the best structure for your business. One of the benefits of a sole proprietorship or partnership is that they’re easy to start.
And you can change the structure to an LLC or corporation at a later date. However, they do come with some legal liabilities, so you should consider if you’re willing to risk your personal assets.
While LLCs and corporations are more complex and expensive to form, they offer more protection. You don’t have to worry about someone getting your home because they sue your business.
An LLC is a great option for individuals and partners, and it can be affordable to file for an LLC. S-corporations also work like sole proprietorships and partnerships because you only have to pay taxes once.
Unfortunately, C-corporations have to pay taxes, and the owners also have to pay taxes. That means you could pay a lot more for this type of business entity.
When deciding on a business structure, consider how many people own the business and how much protection you want. Then, you can file for a formal business entity or not.
Which Business Entity Types Are Right for You?
When starting a business, you should consider a few business entity types. Whether you want the simplicity of a sole proprietorship or the protection of a corporation, you have options.
You can also start a nonprofit if you want to have a charitable organization. Either way, you should learn about the various entities to help make your decision.
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