Types of Business Ownership: Everything You Need to Know
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. 6 min read
2. Sole Proprietorship
5. For-profit Corporation
6. Nonprofit Corporation
8. Organic Growth
Updated August 17, 2020:
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.
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.
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.
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.
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.
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.
A syndicate is a self-organizing group of people or businesses that form together to transact specific business or to promote a common interest.
Organic growth is the process of business' expansion due to an increasing customer base, output per customer, and/or through new sales.
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.