What type of business organization that is owned and managed by a single individual?
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Image source: Getty Images This article highlights some of the benefits and limitations of the most common types of business structures to help you weigh your options and make an informed choice. When you’re looking to launch a new venture or take your existing small business to a higher level, it’s important to choose an ownership structure that can support your goals. The main considerations when choosing a structure for your business are simplicity, liability, control, financing, and taxes. Here are the 10 types of business ownership and classifications:
Common types of business ownershipThe most common forms of business ownership are sole proprietorship, partnership, limited liability partnership, limited liability company (LLC), series LLC, and corporations, which can be taxed as C corporations or S corporations. In addition, social entrepreneurs can choose from nonprofit corporations as well as benefit corporations and low-profit limited liability companies (L3Cs). States provide different business structures with unique requirements and privileges. Some states, for example, provide special structures for professional firms such as professional LLCs (PLLCs) and professional corporations (PCs). Before making any decisions about your business structure, you’ll want to investigate the specific laws of your state. It’s possible to form your business in a state other than your home state where the laws and small business taxes are more advantageous. This is not a simple decision, however, so you would want to do your research and talk to legal and financial advisors before making that call. 1. Sole ProprietorshipSole proprietorship is the default structure of a business that hasn’t filed any paperwork to create a legal entity. It is the simplest form of business ownership, and the structure of choice for four out of five small business owners with no employees. Advantages of a sole proprietorshipSole proprietorship is a simple ownership type with several advantages, including the following:
Disadvantages of a sole proprietorshipSole proprietorships do have their disadvantages compared to other types of ownership.
2. PartnershipsPartnerships, often called general partnerships, are businesses with more than one owner. If you team up on a business venture without forming a legal business entity through the state, your business is a partnership by default. While they don’t require formation paperwork, there may be limitations on naming a partnership in your state, which may necessitate filing a “doing business as” (DBA) name. Partnerships are usually founded on formal partnership agreements outlining the ownership share, rights, and obligations of each partner. Partnerships are a popular type of company ownership for professional firms. Advantages of a partnershipPartnerships provide some notable advantages, including:
Disadvantages of a partnershipFollowing are some drawbacks of partnerships:
3. Limited Liability Partnership (LLP)An LLP is a legal entity available in some states to provide the simplicity and pass-through taxation of a partnership while limiting liability for the partners. In addition to a formal operating agreement among partners, LLPs generally require registration with the secretary of state. Where available, they are a popular type of business entity with professionals such as doctors, lawyers, accountants, architects, and engineers. Advantages of an LLPLLPs provide their owners with many advantages, including:
Disadvantages of an LLPSome limitations of LLPs include:
You can explore business ownership types and requirements in any state by visiting the secretary of state website. Image source: Author 4. Limited Liability Company (LLC)An LLC is a legal entity formed by creating an LLC operating agreement and filing articles of organization with the secretary of state. LLCs allow business owners to retain some of the advantages of sole proprietorship while limiting legal and financial liability, making them a popular business ownership structure for small businesses. When evaluating the advantages of sole proprietorship vs LLC, be sure to weigh all the pluses and minuses. Advantages of an LLCLimited liability is one of several benefits provided by an LLC:
Disadvantages of an LLCFollowing are some of the limitations of LLCs:
5. Series LLCCurrently available in 18 states and counting, series LLCs are an up-and-coming type of business ownership structure. Basically, they allow one parent LLC to form multiple internal LLCs in subsidiary fashion. These nested LLCs can be used to isolate liability for different business units. Series LLCs are complex, but worth discussing with your advisors if your business has distinct units that might benefit from individual treatment. Advantages of a series LLCSeries LLCs provide numerous benefits, including:
Disadvantages of a series LLCSeries LLCs have the following limitations:
6. C CorporationA corporation is owned by shareholders who may have varying levels of control and involvement in the everyday operations of the business. In the case of stock corporations, ownership is issued in shares of stock. A corporation is formed by filing articles of incorporation with the state. The process of incorporation includes appointing a board of directors to oversee the business and establishing bylaws for its governance. With governance managed through a board of directors and ownership distributed among shareholders, corporations represent a further degree of separation between the business entity and its owners. By default, corporations are C corporations, so called because they are taxed under Subchapter C of the Internal Revenue Code (IRC). Unlike sole proprietorships, partnerships, and LLCs, C corporations are not pass-through entities. Profits belong to the corporation and are subject to corporate income tax. They may also be distributed through dividends to shareholders. Advantages of a C corporationWith their formal governance and ownership structures, corporations can sustain any level of growth. Generally, the structure becomes advantageous as a business grows larger. Some of the advantages include the following:
Disadvantages of a C corporationIncorporation also has the following drawbacks:
7. S CorporationSome corporations can enjoy the benefits of pass-through taxation by electing to be taxed as an S corporation. To qualify, the corporation may not have more than 100 shareholders and may issue only one class of stock. Only individuals, certain estates and trusts, and certain tax-exempt organizations may own shares in an S corporation. An S corporation is formed through the same steps as a C corporation, with an additional election made through a filing with the Internal Revenue Service. Advantages of an S corporationThe advantages of an S corporation include:
Disadvantages of an S corporationSome of the drawbacks of S corporations include the following:
8. Nonprofit CorporationMost nonprofits are formed as corporations that apply for tax-exempt status under Section 501(c) of the IRC. Their entity formation process is the same as that of other corporations, with articles of incorporation filed with the secretary of state, a board of directors, and bylaws for governance. Nonprofits may be formed solely for the tax-exempt purposes specified in Section 501(c), however, and they are subject to specific regulatory requirements in each state. Contrary to popular belief, nonprofits can and should generate profits. The difference between a nonprofit entity and a for-profit entity is how those profits are invested. Rather than being distributed to shareholders, profits are reinvested in the nonprofit’s operations to serve its charitable mission. Advantages of a nonprofit corporationNonprofit corporations provide significant advantages, including:
Disadvantages of a nonprofit corporationSome of the limitations of nonprofit corporations include the following:
9. Benefit corporationBenefit corporations are corporations formed to serve a public benefit in addition to the usual corporate mission of earning profits. They are structured like other corporations with a board of directors and bylaws, yet the board is responsible for measuring and reporting on its social impact as well its financial performance. Benefit corporations are an increasingly popular structure for entrepreneurs who want to do good while doing business. Advantages of a benefit corporationBenefit corporations provide the following advantages:
Disadvantages of a benefit corporationFollowing are some of the drawbacks of a benefit corporation:
10. Low-Profit Limited Liability Company (L3C)L3C is a relatively rare business type that combines the legal structure of an LLC with the charitable mission of a nonprofit. An L3C can distribute modest profits to its members, yet this must always be secondary to the primary purpose of furthering a charitable mission. L3Cs may not be formed for political or legislative purposes. L3Cs were conceived as an investment vehicle for foundations, which must give 5% of their assets to a charitable program or program-related investment (PRI) each year. That plan ran into some hurdles with the IRS, however, and the L3C structure has not been widely adopted as a result. Advantages of an L3CAn L3C offers some advantages:
Disadvantages of an L3CFollowing are limitations of an L3C:
Choose the best ownership type for your businessAs you can see, every business structure poses different benefits and limitations. To find the best option for your situation, you’ll need to answer fundamental questions about your business. What is your vision for running the company? How big is your business now, and what are your business development plans? What are your corporate and personal tax rates and how do the various options shake out for your bottom line? What kind of funding do you need? Once you’ve answered those questions, consult with your legal and financial advisors to ensure that you set your business up for long-term success. Expert-picked business credit cards with rich rewards and perksCash back, travel rewards, 0% intro APR financing: all of these can be great credit card perks for business owners. But how do you find the right business credit card for you? There are tons of offers on the market today, and sifting through them to find the right one can be a big hassle. So we've done the hard work for you. Get started with one of our top business credit card picks of 2022 today. |