Company Structure Types: Everything You Need to Know
Company structure types include the different forms that a business can take on. The best structure type for a company depends on many factors.3 min read
Company structure types include the different forms that a business can take on. The best structure type for a company depends on its size, ownership style, plans for growth, and more.
What Is the Structure of a Business?
Business owners need to decide on the right structure for their business before they can get it up and running. Business structures refer to how a company is viewed legally and in the eyes of the Internal Revenue Service (IRS) for taxation. Certain business types also require specific forms of management. For instance, a corporation is required to have a board of directors, but a partnership is not.
Business structures are also called legal structures and business forms. Different forms of businesses also offer varying levels of liability protection to their owners. Some types make the business its own legal entity, which means it's liable for its own actions and financially responsibilities; while others treat the business as a disregarded entity, which means that it cannot be taxed or held liable.
Small businesses with no plans to hire employees or expand ownership will usually find a good fit in the form of a sole proprietorship.
Larger businesses, or small businesses with the hopes of growing much larger, will want to choose a structure that allows others to invest in the business without taking on risks in liability. In order to offer stock options to potential investors and promote the growth of the business, many will choose to incorporate.
Because company structure types are governed by the state laws in whichever state or states they choose to conduct business, there are some differences in the rules and regulations that apply to each type.
In order to be sure that a business owner chooses the appropriate structure for their company and its needs, present and future, they should meet with an experienced business lawyer and discuss their options.
Even though business owners have to option to change the structure of their business down the road, it's always better to get started on the right foot. Changing the structure type of a company can be both time consuming and expensive, so many entrepreneurs will benefit from doing the needed research and making the best choice at the start.
A sole proprietorship is one of the simplest forms of a business. Anyone who starts their own business without filing with their state and officially choosing a business structure automatically forms a sole proprietorship.
Sole proprietorships are defined as businesses that are unincorporated with only one owner. The owner is required to report any of the profits of their business on their own personal income tax return. The sole proprietorship cannot be taxed as its own entity.
Because sole proprietorships are not considered separate legal entities from their owners, the owners are personally responsible for:
- Any legal liabilities that the business takes on
- Financial obligations of the business
- All profits and losses of the business
- All business debts
The only action necessary to form a sole proprietorship is to simply start doing business -- there are no fees or filing requirements with the state.
Any loans taken out for the business will be the responsibility of the sole proprietor, and their personal assets and credit history will be considered by the bank when deciding on the loan. In the event that the sole proprietorship faces legal action, the owner's personal assets will be held liable.
A partnership is defined as a business structure with more than one owner. The owners of a partnership can be individuals or other business entities.
There are a few common forms of partnerships, including:
- General partnerships
- Limited partnerships
- Limited liability partnerships (LLPs)
- Limited liability limited partnerships (LLLPs)
Partnerships are like sole proprietorships because their founders are not required to files paperwork with the state or pay fees in order to start the business.
General partnerships also leave their owners liable for any legal or financial issues, like sole proprietorships. Some liability protection is offered by certain partnership types like limited liability partnerships.
Limited Liability Company
Limited liability companies (LLCs) are a great option for entrepreneurs who want to start a business without taking on the risk of liability that comes with a sole proprietorship or partnership but aren't interested in the more complicated structure found in corporations.
LLCs do require filing with the state, paying a fee, and each state has specific yearly reporting requirements. These additional tasks involved in forming an LLC are usually viewed as worth the liability protection they offer.
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