Key Takeaways

  • The main types of businesses include sole proprietorships, partnerships, limited liability companies (LLCs), corporations, nonprofits, and cooperatives.
  • Choosing the right structure affects tax obligations, liability protection, and management flexibility.
  • Sole proprietorships offer simplicity but no liability protection, while LLCs balance flexibility and limited liability.
  • Corporations allow raising capital through shares but involve more compliance.
  • Nonprofits and cooperatives serve specific community or member-focused goals.
  • Factors like ownership, growth plans, and risk tolerance should guide which business type you choose.
  • Legal professionals can help evaluate your structure’s tax and compliance implications—you can find one on UpCounsel for tailored assistance.

Types of Business Structures

When you begin your business, you will have to determine which types of business structures there are to adopt. Such a decision will affect how your company operates as well as how it is taxed. It will also affect the filing fees, level of paperwork involved, and other important decisions regarding the company’s daily operations.

Below are the various business structures you can choose from when determining how to structure your business:

  • Sole proprietorship
  • Partnership
  • Limited partnership
  • Limited liability company (LLC)
  • Corporation (for-profit)
  • Nonprofit corporation
  • Cooperative

Choosing the Right Type of Business

Selecting the right business structure impacts how you pay taxes, raise funds, and manage personal liability. When comparing the types of businesses, consider:

  • Liability exposure: Corporations and LLCs protect personal assets, while sole proprietorships and partnerships do not.
  • Tax treatment: Sole proprietorships and partnerships use pass-through taxation, while C corporations face double taxation.
  • Administrative requirements: Corporations must adhere to more recordkeeping and reporting, whereas LLCs and sole proprietorships are easier to manage.
  • Funding options: Corporations can issue stock; LLCs and partnerships generally rely on owner capital or loans.
  • Ownership flexibility: Partnerships allow shared control, while corporations have shareholders and boards.

Each business type fits different goals. For instance, freelancers often start as sole proprietors, while growing startups benefit from incorporation for investment and limited liability protection

Sole Proprietorship

If you’re in business for yourself and no one else, then a sole proprietorship is the way to go. Keep in mind, however, that you can’t hire employees. A sole proprietorship is a one-person business. It is the simplest type of business structure to establish; and has its advantages and disadvantages. One of the most significant advantages to establishing a sole proprietorship is that you have complete control over your business, including all decisions regarding financial matters as well as the daily operations of the sole proprietorship.

However, a disadvantage of this business structure is the liability that an owner incurs for the business’s debts and obligations. Unlike an LLC, an owner of a sole proprietorship is financially responsible for all of the business’s liabilities. Therefore, you are placing your assets at risk, and even your own personal property can be seized to satisfy a legal judgment. Another disadvantage to a sole proprietorship is the difficulty in raising money as a lot of financial institutions and other financing resources may be hesitant on providing funding to a sole proprietor.

When to Choose a Sole Proprietorship

A sole proprietorship suits individuals launching small, low-risk ventures such as freelancers, consultants, or online sellers. It offers full control and straightforward tax reporting under your personal income tax return. However, it’s not ideal for scaling or taking on significant financial risk.If your business begins to expand, transitioning to an LLC can help separate personal and business liability while maintaining flexibility

Partnerships: Limited vs. General

A partnership is an entity formed when at least two or more individuals agree to go into business with one another. More specifically, there are two main types of partnership structures, which include general partnerships and limited liability partnerships, also referred to as limited partnerships.

There are no filing fees associated with establishing a partnership nor are partnerships required to hold meetings, prepare meeting minutes, appoint officers, or issue shares of stock. Keep in mind, however, that creditors can initiate legal proceedings against the partnership itself, including the assets of the partners, i.e. house or automobile.

General Partnership

The most common type of partnership, a general partnership is arranged by 2 partners who will have unlimited liability, which means that their personal assets are liable to the partnership’s obligations and debts. The general partnership itself can be information—it can be as easy as a verbal agreement made over dinner. As long as the agreement is put into a written contract, you can create a general partnership.

There are no requirements to business formation with general partnerships. It is entirely up to the partners themselves to determine how to run the business. General partnerships are particularly an attractive type of business for those operating in the legal or medical field. For example, if two attorneys who operate as sole practitioners wish to expand their networks, they may choose to form a general partnership with the purpose of bringing their own specialized knowledge, expertise, and expansive network in hopes to further expand and develop their business.

However, a disadvantage of being a general partner, as previously noted, is the unlimited liability that you face. Therefore, you can be personally liable for the general partnership's’ debts and obligations to creditors, legal suits, and any other financial obligations that the general partnership is responsible for. For example, if someone brings a legal suit against the general partnership, both partners will be defendants in the suit. Moreover, even if you did not engage in any misconduct, if the court finds the general partnership guilty, then both general partners will be held financially responsible for the outcome of the suit.

Limited partnership

Limited partnerships, or limited liability partnerships, are generally established for real estate purposes. When two or more partners form this kind a business, such partners will be liable only for the amount of capital each one invested into the business. Limited partners do not receive dividends but do in fact enjoy direct access to the flow of income and expenses.  Generally, limited partners are not liable for the total and complete debts and obligations of the company. While the limited partnership is different than a general partnership, the limited partners can enjoy general partner-like qualities, including the ability to manage the business like a general partner would as long as a formal contract is in place. Be mindful that limited partnerships will have at least one general partner who controls the daily operations of the business, and who will become ultimately liable for all business debts.

Other Partnership Variations

In addition to general and limited partnerships, there are limited liability partnerships (LLPs) and joint ventures:

  • Limited Liability Partnership (LLP): Common among professionals (lawyers, accountants, architects), LLPs protect each partner from liability for the actions of others.
  • Joint Venture (JV): A temporary partnership between two or more entities formed for a specific project or goal, after which it dissolves.
    Each partnership type differs in its tax handling and liability scope. For instance, LLPs enjoy liability protection similar to corporations but retain pass-through taxation

LLC

An LLC, or a limited liability company, operates essentially as a corporation, sole proprietorship, and partnership all in one. An LLC affords its members with limited liability as they cannot be held personally liable for the company’s debts. An LLC is a sole legal entity; and the name you choose for your LLC is the legal name of your company. This means that the name of your company is the name you will use when conducting business.

The legal name of an LLC lasts until the business is dissolved. Once an LLC is in existence, the owner has the option of also filing a DBA to conduct business under a name different than the registered LLC business name. The members of an LLC can choose whether they want to be taxed as a sole proprietorship, corporation, or partnership. LLC members owe Social Security and Medicare taxes, but such taxes can be paid through the members’ self-employment tax form.

Some advantages of forming an LLC include:

  • Operating an LLC can help you gain credibility with potential customers, vendors, partners, and employees.
  • An LLC offers protection against personal liability, including personal assets; therefore, an LLC is the preferred business type when liability is an issue, i.e. when the company hires employees.
  • Owners will not be personally liable for decisions or actions taken by the LLC.
  • When your company expands, seeking funding is a much more straightforward process.

Single-Member vs. Multi-Member LLCs

An LLC can be:

  • Single-member LLC: Owned by one individual; income is typically reported on the owner’s personal return.
  • Multi-member LLC: Owned by two or more members; profits are distributed according to the operating agreement.
    LLCs are also flexible in how they are taxed—they can elect to be treated as sole proprietorships, partnerships, or corporations. This flexibility makes them one of the most popular types of businesses among entrepreneurs seeking protection with minimal red tape.

Professional and Series LLCs

Some states allow:

  • Professional LLCs (PLLCs): For licensed professionals such as doctors or lawyers.
  • Series LLCs: Allow separation of assets and liabilities into “series,” useful for investors or real estate firms.

These specialized forms expand the flexibility of the LLC model while maintaining liability protection.

Corporation

A corporation is a legal entity operating under the state laws in which the business is incorporated. A corporation is treated as a person for all intents and purposes. Therefore, a corporation can sue and be sued, buy or sell real estate, and even break the law. There are generally two types of corporations—S corporations and C corporations.

S corporations are pass-through tax entities whereas C corporations are completely separate entities from its owners. When choosing which type of business structure, whether it be an S or C corporation, you’ll want to consider both non-tax as well as tax ramifications. However, keep in mind that the only difference between these two types of corporations is with regard to taxation.

A significant distinction between C corporations and businesses that operate as pass-through entities is that owners of C corporations are taxed only on income received. Since a corporation is taxable, the profits leftover after being incurring corporate taxes are not taxed to the owners. Such profits are only taxed when distributions are paid to shareholders in the form of dividends. However, this would be the case for unincorporated businesses and S corporations.

There are several advantages to incorporating your business, which include:

  • A business that is incorporated can file lawsuits and buy/sell property.
  • Incorporation even means that the company can commit a crime, i.e. tax fraud or another type of business crime.
  • Incorporating is simple. Simply file an application within the specific state.
  • All 50 states, including the District of Columbia, recognize both LLCs and corporations.
  • A corporation can evade double taxation of the profits and dividends by choosing Subchapter S tax status.
  • Corporations can deduct normal business expenses before they apportioning income to owners.
  • Corporations can easily transfer ownership through a transfer of securities to the new owner.
  • Corporations can operate for an unlimited period of time.
  • Those businesses set up as S corporations can pass through income to the shareholders.
  • The IRS generally taxes corporations at a reduced tax rate than individuals.
  • Corporations can issue shares of stock.
  • A business that is incorporated can take its company public.

Understanding S Corporation vs. C Corporation

While both S and C corporations offer limited liability, their taxation differs:

  • C Corporations: Taxed at the corporate level, with shareholders taxed again on dividends (“double taxation”).
  • S Corporations: Avoid double taxation by passing income directly to shareholders. However, they are limited to 100 shareholders and must be U.S. citizens or residents.
    C corporations are ideal for companies planning to raise venture capital or go public, while S corporations benefit smaller, closely held businesses seeking tax efficiency.

B Corporations and Benefit Corporations

B Corporations (Certified B Corps) and Benefit Corporations blend profit goals with social missions. B Corps meet certification standards for sustainability and ethics, while Benefit Corporations are legally obligated to pursue public good alongside profit. These modern corporate forms appeal to socially responsible entrepreneurs.

Nonprofit Corporation

A nonprofit organization is one that has been established to meet certain tax exemptions and serve the public interest. All assets of a nonprofit must be reinvested into the organization, given to the public, or given to another charity. Should the nonprofit not meet the needs of the general public, its tax exemption benefit will be taken away.

Some benefits of establishing a nonprofit corporation include:

  • Federal tax exemptions
  • Obtaining private and public grants
  • Low-cost postage
  • Directors can serve with or without compensation

Although most would think that nonprofits can’t sell goods or services for money, you can. Many nonprofit organizations make money selling all types of products and services. Moreover, a nonprofit can also pay salaries for any employees who work there.

The most common type of business structure for a nonprofit is a corporation, which is formed and regulated under state law. Therefore, if a nonprofit incorporates, it must abide by the state requirements of a corporation. This includes:

  • Drafting bylaws
  • Filing the Articles of Incorporation with the state business registrar
  • Hiring a board of directors/trustees

Tax-Exempt Status and Compliance

Nonprofits must meet IRS Section 501(c) requirements to qualify for tax exemption. They must:

  • Operate exclusively for charitable, religious, educational, or scientific purposes.
  • Reinvest surplus revenue into the organization’s mission.
  • Avoid distributing profits to members or directors.

Nonprofits are still required to maintain transparency and file annual informational returns with the IRS. Many nonprofits also register as corporations at the state level for added credibility.

Cooperative

In a cooperative, grassroots business organizers often refer to their business as a “group,” “collective,” or “co-op.” For example, a consumer type of co-op could be established to run a food store, bookstore, or other retail-related business. Some advantages to cooperatives include that they are owned and controlled by its members and there is limited liability. Some disadvantages include the risk of conflict between members and slow decision-making. 

How Cooperatives Operate

A cooperative (co-op) is owned and operated by its members, who share profits and decision-making. Common examples include:

  • Consumer cooperatives: Retail co-ops or credit unions.
  • Producer cooperatives: Owned by farmers or manufacturers pooling resources.
  • Worker cooperatives: Owned and managed by employees.

Co-ops prioritize member benefit over profit, often reinvesting earnings to improve services. They may qualify for special tax treatment under Subchapter T of the Internal Revenue Code if structured properly.

Frequently Asked Questions

1. What are the main types of businesses?

The primary types include sole proprietorships, partnerships, limited liability companies (LLCs), corporations, nonprofits, and cooperatives.

2. Which type of business has the least liability risk?

Corporations and LLCs offer limited liability, protecting owners’ personal assets from business debts and lawsuits.

3. Which type of business is best for small startups?

An LLC is often best for small businesses due to flexibility, pass-through taxation, and liability protection.

4. Can I change my business structure later?

Yes. Businesses often evolve—from sole proprietorships to LLCs or corporations—as they grow or take on investors.

5. Do I need a lawyer to choose a business structure?

While not required, consulting a business attorney can ensure you choose the right structure and file correctly. You can find qualified lawyers on UpCounsel to help with formation and compliance.

If you need help choosing between types of business structures for your company, 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.