When you start your own business, it’s essential that you familiarize yourself with the different types of US business structures. The structure that you choose will have legal and tax implications for your business, and you need to be sure that you’re selecting the structure that will work best with your particular organization.
As an Ohio business attorney, I regularly provide counsel to entrepreneurs who are trying to decide how to structure their business, and I’d highly recommend that anyone starting a business for the first time seek professional legal advice. To give you a sense of your options before you talk to a lawyer, though, I’ve put together basic descriptions of six common types of business entities.
Sole proprietorship. If you are the one person running your small business, you should register as a sole proprietorship. This is a great choice for new entrepreneurs because it’s the most straightforward structure with the fewest barriers to entry. Under this structure, you are viewed as an unincorporated business with no legal distinction between you and the business. As a result, you’re entitled to all profits—but you’re also liable for any financial losses.
Partnership. As you can probably guess from the name, a partnership is a business owned by two or more people. There are several different arrangements under this structure. The most straightforward is a general partnership, where all partners evenly share profits and losses. You can also form a limited partnership, where liability and business input is divided unevenly based on each partner’s percentage of investment in the company. A third common type is a joint venture, where responsibilities and liability are divided evenly, but the partnership is only established for the duration of a single project.
Limited Liability Company (LLC). An LLC is similar to a partnership in that all owners (referred to as “members”) report profits and losses on their personal federal tax returns, and the business itself is not taxed. The business members are considered self-employed, and their personal assets are protected from any debt or lawsuits the LLC may incur.
Cooperative. If you’re creating a business in the restaurant, agriculture, art, healthcare, or retail industry, you may want to establish it as a cooperative. Cooperatives are considered corporations for tax purposes and receive a “pass-through” designation from the IRS, meaning they don’t pay federal income tax as a business entity. The cooperation is run by a group of “user-owners” who purchase shares in the business, make decisions by voting, and distribute profits amongst the group.
Corporation. If you’ve ever heard the dubious expression “corporations are people”, it’s because corporations are considered independent entities from a legal standpoint (just as an individual person is). However, they’re obviously not people; they’re organizations that are owned by shareholders. The business itself is legally liable for its actions and debts, rather than those shareholders. This type of business entity is particularly complex and comes with a lot of legal requirements and administrative fees, so it’s especially important to meet with an attorney if you’re thinking of forming one.
S Corporation. This structure type is for corporations that have been specifically designated as ‘S Corporations’ by the IRS in order to avoid double taxation for the corporation and its shareholders. Under this designation, shareholders are taxed but the business itself is not. If you run a corporation and want to qualify for this, you should first check the IRS stipulations.
Each of the above business structure types is much too complex to be fully explained in a paragraph, so treat these definitions as a basic starting point and make an appointment with an experienced business lawyer to learn more about your options.