Of all the things you’ll do to get your startup off the ground, choosing the right business structure is one of the most important.
Everything from your personal liability to the way you’ll use your profits depends on the business structure you choose. Consider the following when selecting the organization type for your business: flexibility, complexity, liability protection, implications for your taxes, and permits and licensing requirements.
There are several types of business structures to consider, each with advantages and disadvantages. Below is a roundup of the most common structures with guidance on how to choose a business structure that’s right for you.
Sole Proprietorship
A sole proprietorship is the simplest and easiest business structure to form. In fact, it’s the default structure if you’re actively in business, but don’t register as something else.
As a sole proprietor, you can operate under a trade name, commonly known as a DBA (“Doing Business As”) or a fictitious name. Under this structure, your business is you — you’re responsible for all the business’ assets, liabilities and debts since they’re not considered separate from your own. As the owner you are in direct control and all the profits go to you. It offers the greatest freedom from regulations. Another advantage is the bookkeeping is simple. Be aware though that there is unlimited liability with a sole proprietorship. If you need capital to expand, it is more difficult to access with this formation.
Partnership
If a sole proprietorship is the simplest business structure for one business owner, a partnership is the simplest structure for two or more owners. With a partnership, you have additional sources of capital and a broader management base.
Partnerships can take a variety of forms — general partnerships, where everything is shared equally among all partners; limited partnerships, where one person has control of the company and is responsible for all its liabilities; and limited liability partnerships, where all partners have a share of the company’s liabilities.
Like sole proprietorships, partnerships are common structures for new businesses with more than one owner, or for entrepreneurs who want to test the waters before forming a more formal business structure.
Corporation
Corporations are generally the most complicated business structure, cost the most in legal fees to set up and are legal entities in their own right — they can own property, sell ownership rights in the form of stocks and be a party in a lawsuit, for example.
There are several different types of corporations, but the most common are C corporations (or C corp), S corporations (or S corp) and nonprofit corporations.