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:
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:
Business structure comparison table
Business Structure | Ownership | Liability | Taxes |
LLC | One or more owners | No personal liability | Self-employment tax, Personal tax, or corporate tax |
S corporation | One or more owners, but at most 100 US residents. | No personal liability | Personal tax |
Corporation | One or more owners | No personal liability | Corporate tax, Personal tax on dividends |
Partnership | Two or more owners | Personal liability unless the specific business structure blocks personal liability. | Personal tax, Self-employment tax in certain scenarios |
Sole proprietorship | One owner | Personal liability | Personal tax |
Non-profit corporation | One or more owners | No personal liability | Tax-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:
LLC Disadvantages:
S Corporation
There are five requirements to form an S corp, adding more hurdles to business formation than an LLC.
S Corp Advantages:
S Corp Disadvantages:
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:
Corporation Disadvantages:
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:
Partnership Disadvantage:
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 Proprietorship Disadvantages:
Non-profit
Non-profit corporations are the most specific business entity. They may operate for purposes including charity, education, and religion:
Non-profit Advantage:
Non-profit Disadvantage:
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.
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.