5 Common Types of Business Structures, Key Advantages and How To Choose One

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But hold on. Careful consideration of which structure is right for you is crucial because it will have implications for how the IRS taxes your business profits. It’ll also determine whether your personal property is protected when others demand money from your business. Other considerations, including the management of the new business and your long-term plans for it, come into play as well.

Business Structure – Choosing the right Structure for your Business

Five common types of business structures

Here are the five most common types of structures to consider when you’re starting a business, along with their main advantages:

1. Sole proprietorship

This structure works well for low-risk, home-based or retail businesses. A sole proprietorship can also allow an owner to test their business idea before creating a more formal company.

Advantages of the sole proprietorship structure include:

2. Partnership

The partners hold an equal role in owning and operating the company as well as liability for its debts, other partners’ actions or financial obligations. This type of business structure is also known as a “limited liability partnership (LLP).”

A limited partnership (LP) includes general and limited partners. The general partners hold the same role and liability as they would in a general partnership. The limited partners, usually investors, have limited control or input into the company along with limited or no liability. Profits are reflected in personal tax returns.

A partnership is the simplest structure for multi-owner companies or professional groups. It also allows owners to test a business idea before establishing a more formal company

Advantages of the partnership structure include:

3. Corporation

Advantages of corporations include:

There are several other corporation types, including:

S corporation

Becoming an S corporation requires:

Advantages of the S corporation structure include:

Limited liability company

Advantages of the LLC structure include:

What is a business structure?

A business structure is a legal representation of the organization of a company. It defines who owns a company and how the business distributes its profits. You’ll need to have a business structure in place before registering your business with local, state or federal governments. Choose carefully because changing to a different business structure later can be restrictive and costly. You may want to consult with a business counselor, accountant or attorney before making your decision.

The type of structure you choose can affect several factors, including:

How to choose the right business structure

You have outlined your business plan and researched different business structures and now, it’s time to choose. However, your new company fits into more than one type of business structure, so how do you choose the right one?? Here are six factors to consider when choosing a structure.

For more guidance or if you have questions, consult with a CPA or business attorney to confirm your structure selection.

FAQ

What are the 4 types of business structures?

The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a business structure allowed by state statute.

What is a structure of a business?

A business structure is a category of organization that is legally recognized in a given jurisdiction and characterized by the legal definition of that particular category.

What are the 3 main business structures?

The 3 types of business entities that are most common are the sole proprietorship, limited liability company (LLC), and corporation. Each has their own distinct advantages and disadvantages, depending on what you and your business need.

What are the 5 most common types of business structure?

Five common types of business structures
  • Sole proprietorship.
  • Partnership.
  • Corporation.
  • S corporation.
  • Limited liability company.

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