Types of Businesses: Everything You Need to Know
A business type determines a company's organization, types of officers, legal organization, tax strategy potential for shareholders, and level of liability.8 min read
2. Types of Businesses: What Are They?
3. Why Are Business Types Important?
4. Frequently Asked Questions
5. Steps to Start a Business
What Is a Business Type?
A business type is a company's legal structure. Most businesses are one of the following:
- Sole Proprietorships
- General Partnerships
- Limited Partnerships
- Limited Liability Partnerships
- Limited Liability Companies
- S Corporations
- C Corporations
- Nonprofit Organizations
Types of Businesses: What Are They?
Also known as a business form, a business type determines a company's internal organization, types of officers, legal organization, tax strategy potential for shareholders, and level of personal liability. These are the most common business types:
Sole proprietorships are just one individual, and they don't require licenses, paperwork, or fees to set up. The owner is the business and is personally liable for all debts, lawsuits, and judgments. The owner also reports profits and losses on his or her personal tax returns with a Schedule C.
Sole proprietors can use a fictitious business name that is different from their legal name (also known as a DBA for "Doing Business As"), but they are still personally liable for business debts. Additionally, business loans are based on personal credit history and assets.
Partnerships consist of two or more persons who contribute funds and resources. The partners divide the business's profits.
- General Partnerships: General partnerships are easy to form and run, as most states require only basic paperwork and licenses. Their structure is similar to sole proprietorships, only general partnerships have two or more owners.
Partnership owners report profits and losses on their personal tax returns and file an IRS Form 1065. They remain liable for business debts and lawsuits.
- Limited Partnerships: Limited partnerships consist of one or more general partners and several limited partners. All general partners remain personally liable for debts and lawsuits unless the general partner is a corporation or a limited liability company. Limited partners are not personally liable, and they may leave without ending the partnership. General partners report profits and losses on their personal tax returns.
These tend to be best for companies that plan to raise capital from investors who do not participate in daily operations. However, they can also be expensive to create.
- Limited Liability Partnerships: Limited liability partnerships (LLPs) consist of general partners who are not liable for the actions of either partners or employees. However, they are personally liable for business debts.
A hybrid of an LLC and a general partnership, an LLP operates with partnership rules but has the same liability limitations as an LLC. Not every state allows for LLPs, and this type may only be possible for certain professions.
- Limited Liability Companies: Limited liability companies (LLCs) have legal and tax structures independent from their owners, and they enable owners to keep personal assets separate from business debts. These businesses can be taxed like a sole proprietorship, a partnership, or an S corporation.
LLCs can have an unlimited number of owner governed by operating agreements. Owners may possess varying percentages of company ownership.
Owners do not have to hold annual meetings or keep minutes. A managing member typically handles day-to-day operations.
- Professional Limited Liability Companies: These are similar to LLCs, except all members must belong to the same profession.
- Series Limited Liability Companies: These allow for parent and sub-LLCs that maintain separate liability.
- Corporations: Corporations keep owners' personal assets separate from business debts. They must hold annual meetings and keep a record of the minutes.
Corporations are taxed based on profits and shareholder dividends. By sharing profits among owners, corporations may pay lower taxes. There is no limit to the number of shareholders they can have.
Corporations have to document their organizational structure. This can include directors, who make strategic decisions, officers, who handle daily activities, and shareholders, who profit from the business's equity.
- S Corporations: S corporations (s-corps) set up legal and tax structures independent of their owners, allowing for personal assets to stay separate from business debts. The owners of s-corps report their profits and losses on personal tax returns.
Owners and employees of s-corps may receive salaries. In some cases, only owners who have more than a 2 percent share will receive certain benefits.
Shareholders have to be U.S. citizens or residents. There must be fewer than 100 shareholders. These businesses have to hold annual meetings and keep minutes.
- C Corporations: C corporations (c-corps) have structures separate from individual owners and allow owners to maintain separate personal assets. They are required to hold annual meetings and keep a record of the minutes.
C-corps are taxed on corporate profits and shareholder dividends. They are effectively taxed twice, once on the business side and once on the personal side.
C-corps owners split ownership via shares of stock. There is no limit to the number of shareholders they can have, and they can sell more than 100 shares of stock.
- Professional Corporations: Professional corporations (PCs) are composed of professionals in the same field, such as attorneys or doctors. Typically, each owner remains liable for professional actions and malpractice.
- Nonprofit Corporations: Structurally, nonprofit corporations are similar to standard corporations. However, owners organize nonprofits with a charitable, educational, or community-minded purpose.
Nonprofit corporations can collect donations from the general public. They can also apply for grants and raise funds. Most of the funding that nonprofit corporations receive is exempt from taxation. Donors can deduct donations from personal tax returns.
These organizations must keep any profits to pay for expenses and programs. They must also retain any property they receive or pass it along to another nonprofit.
- Cooperatives: Members own and operate cooperatives, or co-ops, usually with a democratic structure. Most co-ops must have bylaws, membership applications, and a board of directors.
Grassroots organizations often create co-ops with the intention of building a consumer-friendly business. Some states have rules and regulations for co-ops, but not all do. Co-ops can be either incorporated or unincorporated.
Why Are Business Types Important?
Choosing the right business type will enable you to launch your company effectively and start making a profit as soon as possible. Consider the risk of personal liability, potential to generate funding, and ability to produce revenue when deciding which type to launch.
Small businesses help people realize the American Dream. The general public has an overwhelmingly positive view of small businesses, placing them ahead of even churches and academic institutions. As a result, state and local governments often make it easy for small businesses to launch and thrive.
Not all small business are alike. They have a variety of needs and give back to local communities in diverse ways.
While many small businesses are truly small, with just a handful of employees, the definition of a small business is a company with under 500 employees. Altogether, 28 million small businesses across the nation employ about 60 million Americans.
There are four kinds of small businesses:
Non-Employee Businesses: There are about 23 million of these sole proprietorships. These owner-focused businesses help provide economic mobility, and they appear to be on the rise. Non-employee businesses require very little paperwork, so you can create a business plan and launch your new company quickly. Some examples of small businesses that are easy to start include:
- Arts and Crafts: You can create goods in your home studio and sell them online, at craft fairs, or at local venues.
- Reselling: Acquiring goods and reselling them at profitable prices doesn't require you to produce anything, but this type of business does demand storage space.
- Skill-Based Services: You can sell skills, such as repair abilities, without having a physical office.
- In-Home Services: When you sell skills in customers' homes, such as dog walking services, you don't need a physical base for your business.
- Consulting: This business type enables experts to sell skills, knowledge, and experience in an industry.
- Micropreneurship: Join the sharing economy and take advantage of existing platforms that enable you to sell goods and services.
- Main Street: There are about 4 million small businesses with a local focus. They include restaurants and retailers that populate every city and town in the United States. Most support families and have relatively high turnover rates.
- Suppliers: There are about 1 million small business-to-business companies. They supply goods and materials to other businesses and help companies across the U.S. run smoothly and efficiently.
High-Growth: There are about 200,000 small businesses that focus on innovation and growth. Also known as startups, these companies create numerous jobs and drive the economy. In Massachusetts, for instance, just 5 percent of the companies drive over three-quarters of growth outcomes.
Frequently Asked Questions
Are there any other business types to consider? Some business experts consider a company's primary focus to be its business type. Choose from one of the following four options:
- Service Business: This type of company provides services instead of goods. A service business may offer skills, consulting, or advice.
- Merchandising Business: Also known as a buy-and-sell business, this type of company buys wholesale goods and sells them at retail. Merchandising businesses sell goods as-is and profit from the margin.
- Manufacturing Business: This type of company buys raw materials and uses them to make new products. Manufacturing businesses utilize labor and factory space to transform materials.
- Hybrid Business: This type of company combines one or more of the other three kinds of businesses.
- Where do I register my business? Contact your Secretary of State to learn the process for registering and getting a business license in your state. Note that you can't form every business type in each state.
- How can I get funding to start a business? Many new business owners apply for loans or grants or raise funds through crowdfunding. In addition, some businesses require very little up-front funding to start.
Steps to Start a Business
1. Develop a business plan. Use a template to develop a business plan that outlines your mission, products and services, and revenue stream.
2. Decide on a business type. If you're undecided, ask yourself a few questions to make the decision easier:
- Is your business for profit or nonprofit?
- Do you want to file business taxes with a business tax ID?
- How much personal liability will you take on?
- How much input will your business partners have?
- Will you hire employees?
- Will members own your company instead of a single owner?
3. Get a business license. If the business type you choose requires a license, file the appropriate paperwork and pay the fees. Get familiar with your local zoning laws if you plan to run a home-based business.
4. Secure your domain name. Lay the foundation for your business's online presence by buying a domain name for your website.
5. Create a website. Use a simple website creator application or hire a designer to build a website for your business.
6. Make a marketing plan. Whether you plan to generate sales through pay-per-click (PPC) ads, social media platforms, or print and broadcast ads, you need a marketing plan.
7. Buy business equipment. From computers and technology to office furniture and supplies, make sure you have what you need to run your new business.
If you need help with business formation, you can post your question or concern 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.