Choosing the Right Business Structure: a Quick Guide

Choosing the right business structure is an essential step on your journey to entrepreneurial success. From sole proprietorships to limited liability companies, here’s everything you need to know about some of the most common business structures

Sole Proprietorship

Here there’s no distinction between your assets and liabilities and those of your business. One of the main downsides is that you may find it hard to raise funds with a sole proprietorship because you are not able to sell stock and banks are often hesitant to lend money to sole proprietors. On the other hand, this is a good option for entrepreneurs looking to try out a business idea.

Partnership

In a partnership, ownership is shared between two or more people. Naturally, this is a good option for businesses with several owners, such as a group of lawyers, for example. There are two types of partnerships:

Limited partnerships (LP). In this type of partnership, there are two types of partners. First, a general partner who makes business decisions and has unlimited liability. Then there is at least a limited partner who invests money without being personally liable for business debt.
Limited liability partnerships (LLP). The idea is similar to limited partnerships, except that here there are no general partners and every partner has limited liability.

As with sole proprietorship, this is a convenient structure to test a business idea before adopting a more complex business structure.

Corporation

Also known as C Corporation or C Corp, this is a separate entity owned by shareholders. This type of business structure offers owners greater protection from personal liability, but the costs of forming a corporation are higher compared to other types of structures. They also involve more extensive requirements when it comes to reporting and record-keeping. It’s worth keeping in mind that C Corporations are often taxed twice, first when the company makes a profit and then when dividends are paid to shareholders. This is a good option for businesses with medium-to-high risk levels or businesses that need to raise money or plan to go public.

S Corporation

Remember that we explained how C Corporations are taxed twice? Well, S Corporations were created to avoid double taxation by allowing profits (and some losses) to be passed on to the owners’ personal income, without being subject to corporate tax. However, not all states recognize S corporations and they must adhere to some specific rules. For example, an S corporation can’t have more than 100 shareholders and all shareholders must be U.S. citizens.

Limited Liability Company (LLC)

This is a very popular type of business structure because it offers the limited liability of corporations while being easier to run. Requirements to form an LLC vary from state to state, but most don’t restrict the number of owners and even permit one-member LLCs.

More Business Tips and Ideas

These are some previous posts you can check out for more ideas on how to lead with confidence:

At the Pomona Chamber of Commerce, our mission is to keep you up to date with the most relevant developments in business management and administration so you and your company can take advantage of new opportunities. Contact us by email (info@pomonachamber.org) telephone (909-622-1256), social media, or click on this link to join and start enjoying the benefits of membership today.