Common Business Structures to Consider When Setting Up Your Buisness

Common Business Structures to Consider When Setting Up Your Buisness

Choosing the right business structure is a pivotal decision that impacts your daily operations, tax obligations, and personal liability. Here’s a concise overview of common business structures to help guide your choice:

Sole Proprietorship

A sole proprietorship is the simplest form, offering complete control to the owner. However, there’s no legal distinction between personal and business assets, making you personally liable for business debts. This structure suits low-risk businesses and those testing new ideas.

Partnership

Partnerships involve two or more individuals sharing ownership. They come in two forms:

  • Limited Partnerships (LP): Consist of one general partner with unlimited liability and limited partners with liability restricted to their investment.
  • Limited Liability Partnerships (LLP): Offer limited liability to all partners, protecting each from the actions of others.

Partnerships are ideal for professional groups and multiple owners testing a business concept.

Limited Liability Company (LLC)

An LLC combines the benefits of corporations and partnerships. It shields personal assets from business liabilities and allows profits and losses to pass through to personal income without corporate taxes. However, members are considered self-employed and must pay self-employment taxes. LLCs are suitable for medium- or higher-risk businesses and owners with significant personal assets.

Corporation

A corporation (C corp) is an independent legal entity separate from its owners, providing the strongest personal liability protection. Corporations can raise capital through stock sales but face double taxation—on profits and shareholder dividends. They are ideal for businesses planning to go public or seeking substantial funding.

S Corporation

An S corporation (S corp) allows profits (and some losses) to pass through directly to owners’ personal income, avoiding double taxation. However, S corps have restrictions, such as a limit of 100 shareholders and specific eligibility criteria. They must also adhere to strict filing and operational processes.

Benefit Corporation

A benefit corporation (B corp) is a for-profit entity committed to social and environmental missions, in addition to profit. Shareholders hold the company accountable for producing public benefits. B corps are taxed similarly to C corps but emphasize purpose alongside profit.

Nonprofit Corporation

Nonprofit corporations are organized for charitable, educational, religious, or scientific purposes. They can obtain tax-exempt status but must adhere to specific regulations, including restrictions on profit distribution. Nonprofits are often referred to as 501(c)(3) organizations, referencing the relevant section of the Internal Revenue Code.

Cooperative

A cooperative is owned and operated for the benefit of its members, who use its services. Profits are distributed among members, and decisions are made democratically. Members purchase shares but have equal voting rights regardless of investment size.

Selecting the appropriate structure depends on factors like liability, taxation, and your business goals. Consulting with legal or financial professionals can provide personalized guidance. If you are considering starting a new business and need advice and/or guidance on which structure would be best, please contact the law offices of Sclafani & Moriarty at 413-732-8356.

For a detailed comparison, refer to the U.S. Small Business Administration’s guide.