When first starting out, most people are not even aware of the different corporate structures available to them and some of the benefits they provide. Depending on the situation you are currently in, having the right corporate structure could make a world of a difference in regards to taxes and liability. Now there are many different types of structures that are available to entrepreneurs in the US, but we are going to focus on some of the most common options used currently.
Corporate business structures that are routinely used today are the following:
Sole proprietorship
Partnership
Limited Liability Company (LLC)
C Corporation
S Corporation
Certified B Corporation
Non-profit business
Sole Proprietorship
In a nutshell, a sole proprietorship is an unincorporated business that is solely owned by a single person who is responsible for all the business’s debt. The IRS views them as a business that is legally not separate from its owner. It is the simplest business structure a person could use because there are no formal filing requirements needed to create one. It is a business structure that is automatically created from the business owners’ activity. Business income and losses are reported directly on the business owner’s personal tax return.
An important fact to keep in mind about a Sole proprietorship is that it is not a legal entity. It does not provide much legal protection to the business owner in regards to liability. This means if the business has any debt, a creditor could go after the personal assets of the business owner.
Partnership
A business operation between two or more people who share in the management responsibilities and profits of the business. Now there are two different types of partnerships that business owners have to choose from, and they include general partnerships and limited partnerships. A general partnership is a partnership where all the partners equally share management responsibilities, profits, and unlimited personal liability for business debts and losses. A limited partnership is a partnership where some of the members do not share all of the management responsibilities and liability. In this type of partnership, there are two types of partners: a general partner and a limited partner.
A general partner is a partner who has management responsibilities and is personally liable for the debts of the business. A limited partner is a partner who has no management responsibilities and their liability is capped at the amount they invested in the business. A limited partner is essentially just an investor of the business. Now aside from any formal filing requirements, all partnerships should have a partnership agreement. A partnership agreement is a contract among partners that controls how the business will be managed, how shares are divided, and how profits/losses will be divided. Now depending on the state in which you do business, you may or may not need to formally file your partnership. Additionally, some states offer different kinds of partnerships that may have better options when it comes to reducing the personal liability of the partnership owners.
Limited Liability Company (LLC)
A limited liability company is a business structure that is regulated by the state, but it is also one of the most popular business structure among small business owners. Since LLCs are regulated by the states, the laws will vary from state to state. Some states allow LLCs to have a single owner and don’t restrict who can be an owner.
LLCs are popular for many small business owners because an owner can report the earning and losses of a business on their own taxes while still having some form of protection from the debts of the business.
C Corporation
C corporations are a business structure where the shareholders/business owners are taxed separately from the business. In a C corporation, business owners cannot commingle their personal funds and assets with the assets of the business. Now corporations offer shareholders, directors, employees, and officers great protections in regards to personal liability. Obligations of the business cannot become a personal debt obligation of any individual associated with the company. Additionally, C corps limit the liability of shareholders to only the amount of money they invested. C corporations must also have annual meetings and a board of directors that are voted in by the shareholders. Unlike other business structures, the C corporation continues to exist as owners change and members of management are replaced.
S Corporation
S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. The term "S corporation" means a "small business corporation" which has made an election under § 1362(a) to be taxed as an S corporation. Like a C corporation, an S corporation is generally a corporation under the law of the state in which the entity is organized. There are a couple of key differences between an S Corp and a C Corp. With an S corp, there are limitations on who can be a shareholder, how many shareholders you could have, the type of stock issued, and they are not eligible for dividends.
Certified B Corporation
Certified B Corporations are a new kind of business that balances purpose and profit. They are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment. The B stands for benefit and B Corp certification is conferred by B Lab, a global nonprofit organization. To be granted and to maintain certification, companies must receive a minimum score from an assessment of "social and environmental performance", integrate B Corp commitments to stakeholders into company governing documents, and pay an annual fee based on annual sales. Companies must re-certify every three years to retain B Corporation status.
Non-Profit Business
A Non-Profit business is a tax-exempt organization formed for religious, charitable, literary, artistic, scientific, or educational purposes. It is an incorporated business from which its shareholders or trustees do not benefit financially. Any money earned must be retained by the organization, and used for its own expenses, operations, and programs.
When it comes to picking the right business structure for your business, there are many different options each with their own pros and cons. Be sure to take your time and research all your options before you make a decision.
Disclaimer: The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.
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