There’s more than one type of business out there! While that may sound like an obvious statement, some entrepreneurs don’t think about this ahead of time. When starting your own business, you’ll need to decide how to structure your business. The right structure will benefit you, while the wrong one could make things difficult later on.
There’s no one-size-fits-all in the world of business structures. The type of business you’re making and your overall objectives for the business should help you decide on the structure. Some of the most popular business structures include:
- Sole proprietorships
- Partnerships
- Limited liability companies (LLC)
- Corporations
Each type has its own pros and cons to consider when you’re working on your business plan. Here are some of the biggest differences between these business structures to help you make the decision that’s right for you.
Sole Proprietorship
A sole proprietorship might be your best option if you’re starting the business alone. Whenever you begin offering a service, you become a sole proprietorship. Maybe you’re a photographer or an IT consultant. In the eyes of the law, there’s no difference between your business and you when it comes to a sole proprietorship.
It’s easy to start a sole proprietorship and maintain it. There’s not a whole lot of paperwork or money needed to keep it going. Because of this, it’s no surprise that it’s the most common structure of business in the United States.
One problem with this structure is the lack of protection for the owner’s personal assets. Because the business owner and the business are one and the same with a proprietorship, when the owner dies, the business dissolves.
Partnership
If you have at least one business partner, a partnership may be the most obvious choice for your business. All the partners involved will share in the business’ profits and losses equally. Although a written agreement isn’t necessary for a partnership, it’s strongly encouraged to keep all parties accountable. With this structure, you won’t have to worry about annual reports or filings. There are no corporate taxes for a partnership!
Like with a proprietorship, there’s no legal distinction between the business entity and the business owners. Each partner is responsible for the business’s financial obligations including any debt it takes on. Although it’s nice to share the difficulties and successes of the business, it’s vital for you to have a good relationship with your partners. If any of them back out, you’ll end up being responsible for more than you signed up for.
There are also different types of partnerships: limited partnerships and limited liability partnerships. With a limited partnership (LP), one partner has unlimited liability while the other partner or partners have limited liability. Usually, that also means they have less control over the company. On the other, all partners have limited liability with a limited liability partnership (LLP).
Limited Liability Company (LLC)
LLCs are especially popular because they carry less risk to the business owner, hence the name “limited liability.” If you’re ever sued or you go bankrupt, you won’t have to worry about your home, savings, or automobiles being at risk. Your personal assets are separate from the business assets, which attracts many entrepreneurs.
This structure falls somewhere between a partnership and a corporation. You can start an LLC with multiple members, but you’ll have to file a different tax form if that’s the case. The stockholders can also have different levels of interest in the success of the business—some of them may even solely invest their services while others help finance the business.
If you choose to create an LLC, you’ll need to maintain detailed records. There are also many requirements you’ll need to consistently meet to keep your liability protection. But on the positive side, you won’t have to deal with any shareholder meetings.
Corporation (C-Corp)
With a corporation (also known as a c-corp), the business liabilities and personal liabilities are separate. If the business is sued, the shareholders won’t be held liable for paying the judgment. Because corporation behaves like its own entity, it must pay taxes every year. You’ll need to file other documents with the state as well to start the business, maintain it, and, if you’d like, dissolve it. Unlike with a sole proprietorship, this business can be passed on to a family member or someone else in the business if the founder passes away.
With a c-corp, there can be many stockholders or just one, and there should also be a board of directors. This means you’ll need to follow guidelines like having annual shareholder meetings and documenting the meeting minutes. You must keep detailed records of all your business dealings.
One downside to a corporation is the cost that it takes to start one and keep it going. It’s one of the more complicated business structures and should really only be taken on if you’re confident you have the time to run it.
Cooperative
A cooperative is a more unusual business structure. It’s formed by several people to meet an economic, social, or cultural need they all have in common. It’s developed for the collective good and managed together by the people who benefit from it. Some of the most common types of cooperatives include agriculture, retail, and finance cooperatives.
The cooperative is flexible. Its end goal of meeting the needs of the members should never change. But as the needs of the members evolve, the tasks done to meet those needs may change.
People may have different roles within that cooperative but they should all hold equal power. In this sense, the cooperative operates like a democracy. Each member has one vote. The cooperative is also not limited to the founding members. With time, others may join and participate and share in the benefits equally to all other members.
Nonprofit Corporation
If you’re starting a not-for-profit organization, the process of choosing a structure won’t be as complicated. You’ll have fewer options. If you’d like to start a charity or an entity that has an educational, religious, or scientific purpose, it could work best as a nonprofit corporation. A corporation isn’t the only structure for a not-for-profit organization. However, it is the most popular structure.
If you choose this structure, you’ll need to follow certain state laws. Although these will vary state to state, some of these guidelines may include electing a board of directors or drafting corporate bylaws. You’ll probably need to hold meetings and record the minutes.
There’s a lot of paperwork and maintenance involved with a nonprofit corporation. But if you have a cause that’s important to you, all this extra work will be worth it!
Summary
What’s best for one business may not be best for yours. Make sure you choose the structure of your business very carefully. You’ll have to consider factors such as liability involved and the costs of running the businesses. Some business structures require more record-keeping and maintenance than others, while others are more flexible. Make sure that whichever you choose is going to set you up to successfully meet your business objectives.
The good news is that you aren’t necessarily locked into your choice of business structure. You can change it! For example, if you start with a sole proprietorship, you may find that a partnership or corporation fits your needs better down the line as the business scales and you create a new set of objectives.
Conclusion
Although the importance of choosing the right business structure may be obvious, the choice is a complex one. If you need help choosing the structure that’s right for you, visit EntrepreneurialGoals.com. I would be happy to help you choose the ideal structure based on your situation and your objectives.
Even after you’ve determined the business structure that’s right for you, there are a host of daily decisions you’ll have to make as an entrepreneur. I can help with those too! My goal is to give all businesses the tools they need to succeed.