Every business owner must choose a legal structure for their business in order to operate, register and pay taxes. There are several different types of legal structures for you to choose from, each with implications for your taxes, personal liability, partnerships and registration requirements. The below is not meant to be an exhaustive list of the different types of legal structures, and is also not meant to serve as legal or tax advice, but can serve as a starting point for your own research. Depending on their needs, many business owners also consult with an attorney.
Some types of legal structures are easier to set up than others. For instance, forming a sole proprietorship does not require you to file any legal documents, while for entities such as corporations, Limited Liability Companies, General Partnerships, Limited Partnerships and Limited Liability Partnerships, you will need to formally incorporate your company with the State of California. You may find more information at the US Small Business Administration website.
Common Types of Business Structures
- Sole Proprietorship
- A sole proprietorship is the most basic type of business to establish. You alone own the company and are responsible for its assets and liabilities.
- General Partnership
- In a general partnership, two or more people share ownership of a single business. The partners manage the business and are responsible for all debts and obligations of the business. The details of this agreement should be written out formally to define the roles of each partner, including what would happen if the business fails.
- Limited Partnership (LP) and Limited Liability Partnership (LLP)
- Limited Partnerships have both limited and general partners. The general partners own and operate the business, while the limited partners invest in the business but have limited liability and thus limited input in its management. Limited liability partnerships are similar to an LP, but in an LLP even the general partners have limited liability – e.g., they are not responsible for the malpractice of the other partners. These business types are not usually used for retail or service businesses.
- Limited Liability Company (LLC)
- An LLC is a hybrid between a corporation and a partnership. Similar to a C-Corporation, business owners in an LLC are not responsible for the debt of the company. In other words, they have limited liability. However, unlike a corporation, the business does not file separate taxes. Instead, each partner (called members) includes their profits on their personal tax return.
- A C-Corporation (C-Corp) is more complex than other business types and is generally suggested for larger, established companies with multiple employees. It is a separate entity from those who own it, meaning it can be taxed (or sued) independently from its owners. In a C-Corp, the owners are called shareholders. They elect a board of directors to oversee major policies and decisions, and appoint officers who carry out the daily operations of the business.
- An S-Corporation (S-Corp) is similar to a C-Corporation except that the business is not taxed separately from the owners. S-Corps are also very similar to Limited Liability Companies (LLCs), but with more limitations. The owners, called shareholders, avoid the double taxation of a C-Corp, but the business is limited to 100 shareholders and has only one class of stock.
- A B-Corporation (Benefit Corporation or B-Corp) is a new business structure in the United States that is set to up to both benefit society and generate money for its shareholders. Directors are required to consider the impact of their decisions on shareholders as well as workers, the community, and the environment. Shareholders in a benefit corporation determine if the company has achieved a material positive impact, which the organization defines beforehand.