Types of Business Structures to Consider

Have you started looking for your first client? Then congratulations—you’ve officially launched your business. That’s all you have to do to establish a sole proprietorship, the simplest business structure.

But while a sole proprietorship is by far the most common type of business structure—more than two out of three businesses fall into this category, according to data from the U.S. Census Bureau—it might not be the right one for you. 

When you plan to have one or more people running the business with you, you might need a partnership. If you want to protect your personal assets, you should think about a limited liability company. And when you’re ready to start seeking out investors or eyeing an initial public offering, you should take a close look at an S Corp or C Corp.

All of this can sound daunting, especially if this is your first business venture. That’s why we’ve taken the time to explain the most common categories of businesses, how they differ from each other, and when each is a good choice for you.

What is a business structure?

Putting it as simply as possible, a business structure is the framework that defines how your business is organized, who has the final say on how it’s run, and who earns the profits and is responsible for its debts. 

What are the types of business structures you should consider? According to the IRS, these are the most popular categories:

• Sole Proprietorship

• Partnership

• LLC

• S Corp

• C Corp

Each of these has different legal, financial, and operational implications for your business. It’s important to consider each type carefully before you make a decision. 

Types of business structures 

There are endless ways to structure a business, but these five types account for nearly all of those opened each year. We’ve arranged them here from the most basic to the most complicated. 

Sole Proprietorship

The most common type of business structure also happens to be simplest to implement and the easiest to manage. There are no forms to fill out, nothing that requires incorporation. In fact, the only thing you need to do to establish a sole proprietorship is to take on your first client.

With no legal distinction between the business and the owner, a sole proprietorship is what is known as a “pass-through entity.” That means that any profit or loss is "passed through" to you, and you report them on your personal income tax return. That means you’re also assuming the financial risk for your business on a personal level. 

This type of business structure is generally appropriate for freelancers who operate on their own. If you’re the owner of an online store or are working as a consultant, this is definitely a business structure you should consider. A sole proprietorship is also ideal when you have a side project.

Pros: 

• As the sole owner of the business, you get to pocket all the profits.

• No need to file separate income tax returns for your business.

• You are fully in control and make all the decisions.

Cons:

• Along with the profits, you get all the debts and losses.

• Business owners may be subject to self-employment tax.

• Your personal assets are not as protected when you have losses. 

Partnership

If you and one or more other people decide to go into business together, you’re forming what’s known as a partnership. There are several types of business structures you can choose from, but most common are a general partnership (each of the partners contributes equally to running the business) and a limited partnership (some partners have less involvement in day-to-day issues). 

In terms of paperwork, a partnership is a bit more complicated than a sole proprietorship, since the business must submit a separate Return of Partnership Income detailing its profits and losses with the IRS. But a partnership is still considered a pass-through entity, so each partner is responsible for reporting their share of the profits or losses on their personal income taxes. 

A partnership is ideal when a sole proprietor brings in one or more others to help run a business that is already off and running. It’s also one of the best business types for startups and small businesses where partners pooling their resources want to keep their initial operating costs in check. Well-established professionals, such as a group of graphic designers whose work compliments each other, often form partnerships to be more attractive to clients with different needs.

Pros: 

• Except for some tax documents, very little paperwork is required.

• Each of the partners shares in the business’s profits.

• Partners share the responsibilities and cost of running the business.

Cons:

• Because partners can leave at any time, the structure isn’t as stable as incorporation.

• As with a sole proprietorship, owners may be subject to self-employment tax.

• Partners are responsible for all the business’s debts and losses.

Limited Liability Company (LLC)

For many business owners, a limited liability company strikes the perfect balance. This type of hybrid business structure combines the simplified pass-through taxation of a sole proprietorship with the personal asset protection of incorporation. 

Whether there’s one owner (a single-member LLC) or two or more (a multi-member LLC), these types of businesses are fairly easy to create by filing documents known as articles of organization with your state. Owners of an LLC are free to decide the structure of the business and whether they run it themselves or appoint a manager.

If you’re running a startup or a small- or medium-sized business, an LLC is worth considering because of the financial protections it provides. It’s often the best choice for freelancers and consultants who want the credibility of a formal business structure without the added paperwork or administrative headaches of a corporation.  

Pros: 

• Your personal assets are protected from business losses and bankruptcy.

• Board meetings and other formalities are usually not required.

• Requires much lower startup costs than corporations.

Cons:

• Owners may be subject to self-employment tax.

• Because they can’t issue stock, LLCs are less attractive to investors.

• States often charge a fee to register and maintain an LLC.

S Corp 

When you incorporate your business, it exists as a completely separate entity. Launching a corporation helps to safeguard its owners from business losses and legal action. With more formal structures, corporations allow you to more easily raise venture capital, offer stock options to attract the best employees, and eventually take your company public.

There are a few different business types associated with corporations. Fairly simple to set up, an S Corp is a hybrid model that allows owners—known as shareholders—to avoid double taxation because it’s also considered a pass-through entity. An S Corp doesn’t pay income taxes, but its shareholders do. 

S Corps are the right choice for businesses that have outgrown simple sole proprietorships and partnerships but do not plan on going public any time soon.

Pros: 

• Shareholders who work as employees of the corporation don’t pay self-employment taxes.

• The assets of individual shareholders are protected from business creditors.

• Business losses can be deducted from the personal income taxes of shareholders.

Cons: 

• There are strict rules for shareholders, capping the total number at 100.

• Only one class of stock is permitted, so you can’t have different levels of investors.

• Only individuals can become shareholders in S Corps, limiting corporate investment.

C Corp

A more complicated business structure, a C Corp is the top choice for those who are preparing for growth in the months or years ahead. It has many advantages over an S Corp, including an unlimited number of shareholders, the ability to take on more types of investors, and the freedom to issue different classes of stock. 

A C Corp is required to have a board of directors in place to help guide business decisions. There are also mandated annual meetings, stricter regulatory requirements, separate income tax filings, and much more paperwork to file. Small- and medium-sized businesses shouldn’t consider a C Corp unless they can take on the administrative and financial aspects.

But If your business is hoping to attract deep-pocket investors or is anticipating an initial public offering, then a C Corp is the way to go.

Pros: 

• As is the case with S Corps, individual shareholders are protected from business creditors.

• There are few restrictions on investors, making raising capital much easier.

• C Corps can offer stock options to attract the best employees.

Cons: 

• More paperwork and administrative upkeep that can be its own workload

• Stock dividends might be taxed on both the corporate and individual level.

• Business losses can’t be deducted on the tax returns on shareholders.

How to choose the right business structure

As you zero in on which business structure is right for you, you should keep in mind several key factors:

Liability protection: If one of your goals is keeping your personal assets safe in the event of losses or lawsuits, consider an LLC. For more established businesses, an S Corp or C Corp also protects your personal property. 

Tax implications: Simpler business structures like sole proprietorships and partnerships allow owners to claim business profits (and deduct business losses) on their personal taxes. A C Corp must file its own returns.

Administrative complexity: Sole proprietorships and partnerships are the simplest to run, since they require little or no documentation. S Corps and C Corps are much more complex, so you need to be prepared for a lot of paperwork.

Growth plans and funding: There are strict regulations on the investors you can have for each type of business. Even when you incorporate, you may encounter limits on who can become a shareholder.

How Squarespace supports your new business

Don’t forget to revisit how your business is structured as it grows. An LLC might be ideal when you launch, but if you decide you want to issue stock options to employees or look for funding from venture capital firms, you might want to become an S Corp or even a C Corp.

Whether you’re a startup run by a sole proprietor or an established business that has dozens of employees, Squarespace can support your next steps, whether that’s brainstorming your business name, writing a business plan, nailing down your niche, polishing your logo, securing your domain and website, boosting your SEO signals, building email campaigns, and more.