Key Takeaways

  • There are several main types of business ownership: sole proprietorships, partnerships, limited liability companies (LLCs), corporations (for-profit and nonprofit), cooperatives, and joint ventures.
  • The right structure affects taxation, liability, management control, and ability to raise capital.
  • Sole proprietorships are simple and low-cost but offer no personal liability protection.
  • Partnerships share profits and responsibilities but can expose owners to shared liability.
  • LLCs blend partnership flexibility with corporate liability protection.
  • Corporations offer strong protection and funding advantages but come with complex regulations.
  • Nonprofits serve charitable goals and may qualify for tax exemptions.
  • Alternative ownership structures, like cooperatives, joint ventures, and franchises, allow shared control or specialized operational benefits.
  • Consulting a business attorney through UpCounsel can help you choose the most appropriate ownership structure for your goals and compliance needs.

Types of Business Ownership: Everything You Need to Know

There are different types of business ownership that you will need to know before you can determine how you want to structure your business. Below are your choices when it comes to running your business: sole proprietorship, partnership, limited partnership, limited liability company (LLC), corporation (for-profit), nonprofit corporation, and cooperative. It is important that you choose the right structure for your business as the type of structure you choose will affect how your business is organized, taxed, and handled.

Sole Proprietorship

A sole proprietorship is a one-person business that is not generally registered with the state. Advantages are that it is rather easy and straightforward to form, you need not worry about other opinions as you are the sole operator of your business, and there is very little government regulation on sole proprietorships. Some disadvantages include limited resources to financing, the business ends when the owner dies, and any losses must be specified on the owner’s personal tax return, meaning that the owner is personally liable for the company’s debts and obligations.

When to Choose a Sole Proprietorship

A sole proprietorship is ideal for entrepreneurs testing a business idea, freelancers, or small-scale service providers with minimal liability risks. It offers full managerial control and easy setup—no formal filings beyond basic licenses and permits. However, since the owner and business are legally the same, personal assets may be used to satisfy business debts.

To mitigate risk, many sole proprietors purchase liability insurance or later transition into an LLC once revenue grows. Typical industries include consulting, photography, real estate, and small retail operations.

Partnership

There are generally two types of partnerships, including a general and limited partnership. There are benefits and disadvantages to each one, particularly in terms of the tax implications and business structure for managers, members, and shareholders.

General Partnership. This type of business structure is created by 2 individuals, each of whom will operate as partners in the business. Each partner will have personal liability in the event that the other partner fails to pay any debts or losses. Furthermore, both partners will be held personally liable to the partnership itself. In order to create a general partnership, the partners can simply draft a verbal or written agreement stating that they intend to enter into a general partnership. There are no specific guidelines that must be adhered to with this type of business structure, as the partners are free to operate the company as they see fit. Note that this type of business structure is quite popular for those specializing in law or medicine.

Limited Partnership. Limited partnerships, or limited liability partnerships, are created when 2 or more individuals come together to form a partnership in which each partner is liable only for the amount of money each one invested into the business.

Limited Liability Partnership (LLP) and Joint Venture

Beyond general and limited partnerships, some states allow limited liability partnerships (LLPs)—popular among professionals like lawyers, accountants, and architects. LLPs protect partners from personal liability for the negligence or misconduct of other partners while maintaining pass-through taxation benefits.

Another hybrid form is a joint venture, a short-term partnership between two or more entities collaborating on a specific project or market expansion. Joint ventures share profits, resources, and risks but dissolve after the project concludes. They are especially common in industries like construction, media, and technology

LLC

An LLC, or a limited liability company, is an attractive business structure for those not wanting to have any personal liability for the company’s losses. An LLC carries many benefits, including the ability to operate as a sole person through a company in which you have no personal financial ties to the losses that your company may incur. Therefore, should you lose a significant amount of money through your LLC, you will not be held personally liable, thus, your personal assets are protected at all time. Furthermore, creating an LLC can help you gain popularity with the public if selling your services or goods. It can also help you obtain loans or financial assistance should you need help.

LLCs are formed under state laws - which vary state by state - when an individual files the Articles of Organization with the Secretary of State’s office in the state you choose to register. A name availability check can be conducted on the Secretary of State’s website in order to ensure that the name is not currently being used. An LLC business owner is required to report any changes in address, membership, or service and must also file an annual report that includes important business and financial information.

LLC owners can choose to be taxed as a sole proprietorship, corporation, or partnership, which is another benefit to forming an LLC. There may be certain tax deductions that an LLC owner can use that cannot be deducted through a DBA. On the contrary, the DBA confers no special income tax status, meaning the owner must pay taxes in accordance with its own filing status.

LLC Management and Tax Considerations

LLCs can be managed by their members (owners) or by designated managers, depending on the flexibility desired. Member-managed LLCs work best for small businesses where all owners want operational control, while manager-managed LLCs suit larger entities or passive investors.

From a tax standpoint, LLCs are considered “disregarded entities” by default (sole proprietorship for one owner, partnership for multiple owners). However, members can elect S corporation or C corporation tax treatment by filing Form 8832 or Form 2553 with the IRS. This flexibility can reduce self-employment taxes or allow profits to remain within the company for reinvestment.

For-profit Corporation

Simply put, a corporation is treated as a person as the corporation can itself initiate legal suits or be sued, buy/sell real estate, and even break the law, i.e. fraud. Specifically, there are two types of corporations, including S corporations and C corporations.

S corporations are known as “pass-through” entities for tax purposes. C corporations are viewed as entirely independent entities from the owners and managers. Before you determine which type of corporation to operate, you’ll want to consider the benefits to each type of corporation. The main difference between the two is the tax implications that come with operating each type of corporation.

The tax difference is simple: Owners of C corporations are taxed on income received, and nothing else. Therefore, any leftover profits of the C corporation after being taxed are not then taxed to the owners. However, this is the opposite for S corporations in that owners of S corporations are in fact taxed, hence why these types of entities are referred to as “pass-through” tax entities.

Regardless of whether you choose to operate an S or C corporation, there are many benefits to owning a for-profit corporation, including the fact that a business owner can use the business to file lawsuits and buy property. Furthermore, incorporating is simple and straightforward. Therefore, it won’t take you long or cost that much to incorporate your S or C corporation. As a business owner, you can deduct normal and ordinary business expenses from your income. In the event that you choose to transfer ownership of your corporation, you can easily do this with no hassle. Should you choose to issue stocks to shareholders, you can do so with ease. There are several benefits to owning a for-profit corporation, so be sure to look at the specific details before determining what type of corporation you want to own.

C Corporation vs. S Corporation Key Differences

While both C and S corporations protect owners from personal liability, their tax structures differ significantly.

  • C Corporations: Pay corporate income tax on profits and shareholders pay tax again on dividends (double taxation). However, they can issue multiple stock classes and attract unlimited investors, making them ideal for startups seeking venture capital.
  • S Corporations: Avoid double taxation by passing income and losses to shareholders, who report them on personal returns. S corps are limited to 100 shareholders and must be U.S. citizens or residents.

Corporations also have additional compliance requirements—like annual shareholder meetings, board elections, and maintaining bylaws—but provide the best scalability for long-term growth.

Nonprofit Corporation

A nonprofit organization is one that operates to benefit the general public. While such corporations can be established to benefit certain populations, i.e. the handicap, mentally ill, animal population, etc., the goals are similar in that the nonprofit organization works to serve the interests of the public. Benefits of creating a nonprofit corporation include several tax exemptions, particularly if you operate a 501(c)(3) nonprofit; eligibility to apply for and obtain private/public grants; and several other benefits that overall assist the nonprofit in its daily operations at a much lower cost.

While nonprofits are generally organized as corporations, they can also be formed as LLCs in certain states, including Delaware, California, Michigan, Minnesota, and Texas. While LLCs do not have tax-exempt status, a nonprofit operating as an LLC generally does so long as the LLC elects to be treated as a corporation for tax purposes. Furthermore, the LLC must have a nonprofit purpose, which some states simply don’t allow. For example, some states require that when a business registers as an LLC, the application must state the purpose of the business.

Nonprofits don’t have a specific economic purpose but are rather charitable organizations organized to serve the needs of the public. Therefore, certain states simply do not allow nonprofits to register as LLCs. It is important to note that on a federal level, the IRS will not give a nonprofit LLC tax-exempt status unless all of the members are tax-exempt organizations themselves. For example, if four tax-exempt charities come together to create a nonprofit LLC, then the LLC will benefit from federal tax exemptions.

Starting and Maintaining a Nonprofit Corporation

To form a nonprofit, founders must draft articles of incorporation stating a charitable or educational purpose, apply for 501(c)(3) tax-exempt status with the IRS, and register with their state’s charity bureau. Nonprofits must adhere to strict reporting requirements, such as filing Form 990 annually and maintaining transparent financial records.

Nonprofits cannot distribute profits to members or directors but can pay reasonable salaries. Many also form subsidiaries—like nonprofit LLCs or hybrid social enterprises—to support revenue-generating activities while protecting their mission.

Syndicate

A syndicate is a self-organizing group of people or businesses that form together to transact specific business or to promote a common interest.

Cooperatives and Franchises

A cooperative (co-op) is a member-owned business formed to serve shared economic, social, or cultural needs. Each member has equal voting rights, and profits are distributed based on participation, not investment size. Common examples include agricultural co-ops, credit unions, and housing cooperatives.

A franchise allows individuals to operate under an established brand’s name and business model. Franchising provides brand recognition and training, but franchisees must pay ongoing royalties and adhere to strict operational guidelines. Popular examples include restaurants, gyms, and service-based businesses.

Organic Growth

Organic growth is the process of business' expansion due to an increasing customer base, output per customer, and/or through new sales.

Choosing the Right Business Ownership Type

When choosing between the types of business ownership, consider:

  • Liability Exposure – How much personal risk are you willing to assume?
  • Taxation – Do you want pass-through taxation or prefer to reinvest profits at the entity level?
  • Management Control – Will all owners be actively involved, or will you appoint managers?
  • Funding and Scalability – Do you plan to seek investors or remain self-funded?
  • Administrative Requirements – How much paperwork and compliance are you prepared to handle?

Your choice will impact everything from daily operations to long-term growth potential. If you’re uncertain, a qualified business attorney can evaluate your situation and help you file correctly through UpCounsel’s attorney marketplace.

Frequently Asked Questions

1. What is the most common type of business ownership?

The sole proprietorship is the most common type, especially for small and home-based businesses, because it’s inexpensive and easy to start.

2. Which business ownership provides the best liability protection?

Corporations and LLCs offer the strongest personal liability protection because they legally separate the business from its owners.

3. How does business ownership affect taxes?

Business structure determines tax obligations. Sole proprietors and partnerships use personal returns, while corporations file separate tax returns. LLCs can elect their preferred tax classification.

4. Can nonprofits make a profit?

Yes, nonprofits can generate revenue, but profits must be reinvested into their mission rather than distributed to members or owners.

5. How do I decide which business structure is right for me?

Consider your liability risk, growth plans, and tax preferences. Consulting a qualified business attorney via UpCounsel can ensure you select the structure best aligned with your goals.

If you need help choosing which type of business you want to own, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.