How to choose a business structure that's right for you.

Many aspiring owners and entrepreneurs ask: which business structure is right for me?

How you structure your small business is a decision you'll feel reverberations from for years. The business structure you select impacts your taxes and might add many responsibilities on top of running your core business.

Use this blog as your guide to business structuring that's right for you, whether you're just starting or considering shifting how your business is structured. Whatever the case, this blog is packed with tips and insights that could fundamentally improve your business.

What is a business structure?

A business structure, or entity, is an organization formed to operate a business. If you are forming a business, you can choose from the following business structures: 

  • Corporation 
  • Limited liability company (LLC) 
  • Non-profit
  • Partnership
  • S corporation 
  • Sole proprietorship

    • Why choosing the right business structure is important

    Each business structure has its advantages and disadvantages. Your chosen structure will impact aspects of your business, such as: 

  • Liability – Specific business structures protect your assets from lawsuits. 
  • Record keeping – Each business legal structure has a different tax form.
  • Taxation – Some tax structures categorize their business income as personal income, while others tax business and personal income separately. 
  • Company hierarchy – Corporations must have a board of directors, while sole proprietorships and other structures do not. 
  • Registration – Your legal structure is a requirement for registering your business in your state.
  • Fundraising – Your structure can block you from raising funds. 

    • Business structure comparison table

    Business StructureOwnershipLiabilityTaxes
    LLCOne or more ownersNo personal liabilitySelf-employment tax,
    Personal tax, or corporate tax
    S corporationOne or more owners, but at most 100 US residents.No personal liabilityPersonal tax
    CorporationOne or more ownersNo personal liabilityCorporate tax, Personal tax on dividends
    PartnershipTwo or more ownersPersonal liability unless the specific business structure blocks personal liability. Personal tax, Self-employment tax in certain scenarios
    Sole proprietorshipOne ownerPersonal liabilityPersonal tax
    Non-profit corporationOne or more ownersNo personal liabilityTax-exempt

    Different types of business structures

    There are several business structures to choose from, each with its own strengths and weaknesses. 

    Limited Liability Company

    Different LLCs are available: a single-member LLC and LLCs with multiple members.

    LLC Advantages: 

  • Pass-through taxation. Members can pass profits and losses through to their owners. 
  • Flexibility. For tax purposes, LLCs can be either single-member or with multiple members. 

    • LLC Disadvantages:

  • All LLC members must pay their individual taxes on the company’s earnings. 
  • The cost of starting an LLC is also higher compared to other business entities.

    • S Corporation

    There are five requirements to form an S corp, adding more hurdles to business formation than an LLC.

    S Corp Advantages: 

  • S corps allow shareholders to avoid double taxation found in other business entities due to their structure as a pass-through entity. 
  • It includes liability protection for business owners and shareholders, allowing business assets to remain separate from personal assets. 

    • S Corp Disadvantages: 

  • You can only form as an S corp after being a C corp or an LLC first; shareholders will do this through a shareholder election. 
  • There are demanding processes to remain an S corp, including keeping Articles of Incorporation and corporate minute documents current. 
  • Tax burden. Shareholders must pay taxes on their S corps’ income even if they didn’t receive a portion of their income.
  • Salary requirements. Officers and owners of an S corp must make a reasonable salary even if the corporation is unprofitable. 

    • Corporation  

    Members of corporations are shareholders who are separate from the corporation. Corporations have four requirements, making formation more complex than other entities.

    Corporation Advantages: 

  • You'll have limited liability protection if you form a C corp as an owner or a shareholder. This gives shareholders peace of mind knowing their personal assets are protected.
  • You may pay taxes at a lower tax rate if your business income falls into a lower tax bracket. 
  • Tax deductions. Corporations can receive tax deductions, including bad debt, charitable donations, depreciation, etc. 

    • Corporation Disadvantages: 

  • C corps are more challenging to form compared to other business structures. 
  • C corps are subject to double taxation. Double taxation occurs when the corporation pays a federal tax, and shareholders pay an individual tax for the corporation’s profits. 

    • Partnership

    Partnerships are an excellent option for those considering starting a business with at least two people. There are three different partnerships that you can form, with general partnerships being the most common.

    Partnership Advantages:

  • All partners can manage the business and share profits. 
  • You are more likely to get a business loan if there is more than one business owner, which is particularly helpful if you have a low credit score. 

    • Partnership Disadvantage:

  • Partnership liability. Personal assets can be sought for all members in a general partnership.

    • Sole Proprietorship

    Sole proprietorships are the most uncomplicated business structures to form, and it is also the most common, allowing you to create a business and operate it as an owner.

    Sole Proprietorship Advantages:

  • Sole proprietorships require you to use your individual income tax return (Form 1040) and information about your business’s loss or profits (Schedule C) for tax purposes. 
  • Maintaining a separate bank account to conduct your business is optional.
  • You can dissolve your business at any time without formal paperwork.

    • Sole Proprietorship Disadvantages:

  • Sole proprietors are personally liable for company debts and lack liability protection. 
  • You’ll be responsible for several taxes that other business entities avoid, including income, sales, and self-employment taxes. 

    • Non-profit

    Non-profit corporations are the most specific business entity. They may operate for purposes including charity, education, and religion: 

    Non-profit Advantage:

  • The business structure of non-profit corporations allows them to have an exemption from state and federal taxes. 

    • Non-profit Disadvantage:

  • Non-profits can only use their earnings for narrow purposes and the industries or groups they serve.  

    • Factors to consider when choosing a business structure

    There is no one size fits all best business entity for small businesses. There are many factors to consider when selecting a business structure for your latest venture. But there are a couple of questions to ask that will help to encourage a selection. 

  • How much personal liability are you willing to take on, if at all? 
  • How much flexibility do you need to perform the core duties of your business? 
  • What sort of tax scenario works best for you? 

    • The answers to these questions and others will help determine the proper business structure. 

    Work with Professionals who specialize in entity formation

    Many small business owners pay more taxes than they have to in their first year of operation, which is often attributed to incorrect business structuring. Choosing the best structure for your small business can be difficult and time-consuming, but it doesn't have to be when you work with the professionals at 1-800Accountant. 

    Never ask, "What business structure should I choose?" again. All it takes is a quick consultation – usually 30 minutes or less – to learn how we can help with business formation to get you started, along with other essential accounting services to help keep you running!

    This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.