Business Structure
Business structure refers to how a business is legally organized. There are four main types of business structures:
- Sole proprietorship
- Partnership
- LLC
- Corporation
The type of business structure you choose will affect how your business is regulated, taxed, and more.
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Business Structure Meaning | Business Structure Definition
A business structure refers to how a business is legally organized . The type of business structure can affect how a business is regulated, taxed, and more. Because of this, choosing the best structure for your business is one of the most important decisions you will make.
Before choosing, the first step is to learn a little about the business structure options available to you and the pros and cons of each.
Types of Business Structures
There are several broad categories of business structures, with some of these categories having additional structures in them. The following are some of the most common:
Sole Proprietorship
A sole proprietorship is a business owned by an individual that isn't formally organized. A sole proprietor files taxes under their own name and is personally liable for any debts or legal actions taken against the business.
Partnership
A partnership is a business owned by more than one individual that isn't formally organized. The term partnership usually refers to a general partnership. A general partnership files taxes under the partners' names, and the partners are liable for any actions taken against the business.
However, there are also other types of partnerships. A limited partnership (LP) allows one or more partners to serve as passive investors rather than directly managing the company. Limited partners have personal liability protection. A limited liability partnership (LLP) provides some amount of personal liability protection to all of the partners.
LLC
An LLC is a US business structure that offers the personal liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership.
An LLC with one owner is called a single-member LLC, and an LLC with more than one owner is called a multi-member LLC. There is also a professional limited liability company (PLLC) structure, which is designed for certain types of licensed professions, such as attorneys, architects, doctors, and engineers.
Corporation
A corporation is a registered business treated as a separate legal entity from its owners, also known as shareholders, and guided by a board of directors. Corporations offer limited liability protection, with owners’ assets protected in the event of legal action or business debt.
There are several types of corporations:
- C Corporation (C Corp): C corps are separate business entities owned by shareholders.
- S Corporation (S Corp): An S corp is a tax designation for a business rather than a business structure itself. Both C corps and LLCs can opt to be taxed as an S corp.
- Nonprofit Corporation: A nonprofit corporation is designed to benefit the public or a particular group rather than earn profit to benefit its owners. Nonprofits include charitable, religious, and political organizations, among others.
- Benefit Corporation (B Corp): A B corp is a for-profit corporation that must have a goal to benefit the community or the environment.
Choosing a Business Structure
Choosing a business structure is one of the most important decisions you will make for your business. The best structure depends on your business’s unique needs and characteristics. There are several things to consider when making this decision.
- What are your profit and risk levels?
- Is being investor-friendly important?
- Would maintaining a complex business structure be worth the effort and expense?
Answering these questions will help you decide whether you need a structure that offers personal liability protection, which tax structure would be best for you, and, ultimately, which business structure is best.
Our Choosing a Business Structure guide will give you a detailed look at the things you will want to consider before starting your business.
How to Start a Business
Once you have learned about the advantages and disadvantages of the different business structures and decided which is the right one for you, you will need to actually form and set up the business. Whether you choose to form a corporation, an LLC, or some other structure, there are more things to take care of before you are ready to sell your products or services.
You can read these in more detail in our state-by-state How to Start a Business guides, but here is a quick rundown of some basic steps after forming your business:
- Register for taxes
- Create business banking and credit accounts
- Set up accounting
- Obtain permits and licenses
- Get insured
- Establish a web presence
Business Structure FAQ
What is a business structure?
A business structure is how a business is organized. The type of business structure can affect how a business is regulated, taxed, and more.
What are the types of business structures?
Some of the most common categories of business structures include sole proprietorship, partnership, LLC, and corporation.
Which business structure is best?
The best structure for your business depends on your business’s unique circumstances and needs. Our Choosing a Business Structure guide can help you decide the best structure for you.
How do I choose a business structure?
You should answer a few questions, including:
- What are your profit and risk levels?
- Is being investor-friendly important?
- Would maintaining a complex business structure be worth the effort and expense?
Knowing the answers to these will help you choose the best business structure. Read our Choosing a Business Structure guide for more details.
How do I start a business?
The steps to start a business can vary depending on the business structure and from state to state. Check out our How to Start a Business guides for detailed instructions for your state.