Which Business Type Is Best for Your Company?
Each type serves a special purpose or concern
You might be trying to sort out all the different types of business structures that are available and wondering which is best for you if you're considering starting a small business. Each type serves a specific purpose, situation, or concern relating to taxes, liability, and your ability to control the profits and losses of the business.
There Are 3 Basic Types of Business Organizations
There are three basic types of business organizations. A corporation is a business that is separate from its owners. The owners are its shareholders. Some owners might also be executives or employees, and they're paid as employees for the duties they perform in addition to receiving shareholder dividends. An S corporation is a specific type of corporation.
Multiple-owner businesses are owned by several individuals. They include partnerships and limited liability companies. Their owners are not employees.
A single-owner business is owned and operated by just one person. This type of business also includes the single-owner LLC business. A sole proprietor business doesn't have to be registered with the state.
Which Business Type in Which State?
Requirements and rules for business structures are set at the state level through each state's business division or corporations office. Some states allow just certain types of businesses, and many have different regulations and limitations on which business type can be established there.
Check with your state secretary of state to be sure of the rules in your location, keeping in mind that some states use different terms for this department. You might also check with the business division or another similar department to see if the type of business you want to form is available there.
All states allow corporations, partnerships, and LLC's, but some variations on these basic business types might or might not be available.
A sole proprietorship is a type of business operated by one individual. The business is not considered a separate legal entity from its owner. Its profits and losses are included on the individual's personal tax return, and the owner has personal liability for business debts and lawsuits.
You can basically just get a business bank account and start taking money from customers if you want to start a sole proprietorship.
An incorporated business is separate from its owners. The corporation is formed with Articles of Incorporation under the laws of the state in which it is operating.
The corporation pays its own taxes, and the owners pay taxes on their ownership shares as shareholders on their personal returns. They also report income earned as employees on their personal returns when they additionally serve the business in an employee capacity.
A subchapter S corporation or S corp is a corporation which has the limited liability benefits of a corporation but is taxed as though it were a partnership. Business income or losses flow through to the individual shareholders.
A Subchapter S corporation isn't set up by registering with a state. You must first set up a corporation in your state then you can elect S corporation status with the Internal Revenue Service. This election must be done within a specific time period so check with a tax professional to make sure the election is done correctly.
All states give you the ability to set up a limited liability company (LLC) by registering Articles of Organization or a similar document with the state.
An LLC is not a corporation, but it has the liability protection of a corporation and other benefits as well, such as ease of formation. You can have a single-member LLC that pays taxes like a sole proprietorship or a multi-member LLC which pays taxes like a partnership. You can even have an LLC that's taxed like a corporation or an S corporation.
You might also want to look into the Series LLC, a new type of LLC which is available in a few states if you want to set up multiple LLCs. You can have a parent LLC and many sub-LLC's, each with separate liability.
A partnership is a business entity with two or more individuals who share the risks and benefits of the business. A partnership can include general partners who bear liability for partnership debts and for actions of the partnership. It might also include limited partners who are merely investors and who don't share in the day-to-day operations of the business or in liability.
You can sometimes also form a specific type of partnership depending on the regulations of your state. These can include general partnerships, limited partnerships, and limited liability partnerships.
A professional corporation is a specific type of corporation for professionals such as attorneys, doctors, architects, or accountants. These professionals can form a corporation in some states with the distinction that each professional is still liable for his or her own wrongful professional actions.
A general partnership is a partnership which includes only general partners. Under this structure, all partners participate in the day-to-day operations of the business, and they all bear personal responsibility for the debts and liabilities of the partnership.
A partnership is sometimes called a "limited partnership" when it has both general partners and limited partners. A limited partnership is an entity distinct from its partners.
As with a partnership, the general partners deal with the day-to-day operations of the business, and they have liability for debts and for actions of the other partners. Limited partners do not participate in the day-to-day operations of the partnership, and they bear no liability for its debts or actions.
Limited liability partnerships (LLPs) are formed with general partners but all the general partners are shielded from liability for the acts of the others as well as employees. The LLP is similar to a limited liability company but the LLP operates under partnership rules.