{"id":4893,"date":"2016-04-04T10:47:49","date_gmt":"2016-04-04T15:47:49","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/types-of-business-structures.html"},"modified":"2025-10-26T00:12:00","modified_gmt":"2025-10-26T05:12:00","slug":"types-of-business-structures","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/types-of-business-structures.html","title":{"rendered":"Types of Business Structures"},"content":{"rendered":"\n
\n

Types of Business Structures<\/h1>\n\n
\n
\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
\n

Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
\n

This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
\n

The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

\n

The different types of <\/span>business structures<\/span> you choose for your business will impact your personal liability<\/span> protection<\/span> and how you file federal <\/span>income taxes<\/span>. Common business structures<\/span> include sole proprietorships<\/span>, partnerships, limited liability companies<\/span> (LLCs), and corporations.<\/p>\n\n <\/div>\n\n\n\n

One of the most important decisions new <\/span>business<\/span> owners<\/span> face is choosing their corporate structure<\/span>. The business structure<\/span> impacts your business\u2019s tax status. This, in turn, affects how you file your income <\/span>tax<\/span> return<\/span> and the filing requirements<\/span> for your business. It also impacts how your business raises money.\u00a0<\/p>\n

The IRS<\/span> recognizes several different types of business entities<\/span>.\u00a0Each form of business<\/span> has its pros and cons<\/a>. Since every business is unique and has its own needs and goals, do your research before choosing. The following is an overview of the various types of <\/span>business structures<\/span>. Let\u2019s explore the most common types and their implications for business owners<\/span>.<\/p>\n

Need help with business formation? Our trusted partner LegalZoom makes it easy\u2014packages start at $0 + state filing fees.<\/a><\/b><\/em><\/p>\n

Sole Proprietorships<\/span><\/h2>\n

A\u00a0sole proprietorship<\/span><\/a>\u00a0is a simple business structure<\/span>. In this structure, an individual owns and operates the business. There is no legal distinction between the owner and the business entity<\/span>. Unlike other types of <\/span>business structures<\/span>, you do not have to register it with the secretary of state<\/span>. You are the sole owner of your business. You simply need to begin business operations to create a sole proprietorship<\/span>.<\/p>\n

In a sole proprietorship<\/span>, you will\u00a0pay taxes<\/a>\u00a0on any business profit as income on your personal taxes. If your business has any liabilities, such as a court judgment or a past-due debt, you are personally liable for them. In other words, you are responsible for paying them. You might face self-employment<\/span> taxes<\/span> on your business income.<\/p>\n

You should consider opening a separate bank account for your business expenses, even if you are a sole proprietor<\/span>. Opening a bank account as a sole proprietor<\/span> is straightforward. For more information, visit FindLaw\u2019s\u00a0Starting a Sole Proprietorship<\/span> FAQ<\/a>\u00a0page.<\/p>\n

General Partnerships<\/span><\/h2>\n

When two or more entrepreneurs come together to run a business, they often\u00a0form a partnership<\/a>. A partnership is like a sole proprietorship<\/span> in that the owners of a\u00a0partnership<\/a>\u00a0do not need to register their business entity<\/span> with the state. The partnership begins when you start a business with one or more other people. They might have an agreement, called a partnership agreement<\/span>, to outline how they\u2019ll work together.<\/p>\n

Also, like a sole proprietorship<\/span>, each partner will report their share of the business profits on their personal <\/span>tax returns<\/span> as income. Partnerships don\u2019t pay business taxes themselves. Instead, the income and losses are passed to the individual partners. Each partner is personally liable for any debts, claims, or other liabilities that the business is liable for. However, like sole proprietors<\/span>, partners might face self-employment<\/span> taxes<\/span>.<\/p>\n

Limited Partnerships<\/h2>\n

Limited partnerships (LPs) are slightly\u00a0different than general partnerships<\/span><\/a>. Limited partnerships cost money and can be difficult to set up. LPs have both general partners<\/span> and limited partners<\/span>. General partners<\/span> manage the business and handle day-to-day operations<\/span>. They make decisions, oversee activities, and are the face of the business. They have a higher degree of responsibility as a general partner<\/span>.\u00a0<\/p>\n

General partners<\/span> have unlimited <\/span>personal liability<\/span> for debts incurred by the LP. Limited partners<\/span>, in contrast, have a more passive role. They contribute capital. They are not involved in daily operations. LPs enjoy a shield from personal liability<\/span> involving the partnership\u2019s debts or legal issues. They have less liability than general partners<\/span>. Their liability is generally limited to the amount they\u2019ve invested in the business.<\/p>\n

Both general and limited partners<\/span> share in the profits\u00a0or losses\u00a0of the business. Their share is dependent on their investment or the partnership agreement<\/span>. They\u00a0report the income<\/a>\u00a0on their personal income taxes<\/span>.<\/p>\n

Limited Liability Partnerships<\/span><\/h2>\n

Limited liability partnerships<\/span><\/a>\u00a0(LLPs<\/span>) blend features from both partnerships and corporations<\/a>. One major advantage of an LLP<\/span> is that profits and losses pass directly to the partners. This avoids the double taxation<\/span> issue faced by some corporations.<\/p>\n

In an LLP<\/span>, states with \u201cfull shield laws\u201d allow the partners to enjoy protection from personal liability<\/span> for business debts<\/span> or actions taken by their partners. All partners may take part in the business\u2019s operations.<\/p>\n

LLPs<\/span> offer more flexibility than traditional corporations<\/a>, but they are often subject to specific state regulations. Their formation is often more suitable for certain individuals in specific professions such as lawyers, accountants, and architects.<\/p>\n

Limited Liability Companies<\/span><\/h2>\n

A\u00a0limited liability company<\/span><\/a>\u00a0(LLC) combines the best features of corporations<\/a> and partnerships. Business owners<\/span>, known as members, enjoy protection from personal liability<\/span> for company debts. This feature is like a corporation. This means that if the LLC faces financial or legal issues, members typically risk only their investment in the company. Their personal assets<\/span> are not at risk. To learn more about forming an LLC, visit FindLaw\u2019s\u00a0Forming an LLC<\/a>\u00a0page.<\/p>\n

On the tax front, LLCs often operate more like partnerships. Instead of the company paying its own taxes, the profits and losses pass through\u00a0to members\u2019 personal <\/span>tax returns<\/span>. This structure provides flexibility and simplicity. Because of this, LLCs are a popular choice<\/a> for many entrepreneurs and small <\/span>business<\/span> owners<\/span>.<\/p>\n

Corporations<\/h2>\n

Corporations<\/a>\u00a0are a more formal\u00a0business structure<\/span>. This legal structure offers the most robust protection to their owners from personal liability<\/span>. During incorporation, a business transforms into a distinct legal entity<\/span>. This entity is separate from its founders or shareholders. There are different types of corporations<\/span>, each with unique features.<\/p>\n

A corporation requires a board of directors<\/span> and can issue different classes of stock to raise capital for its for-profit<\/span> operations.<\/p>\n

The default status of a corporation is a\u00a0C corp<\/span><\/a>. A C corp<\/span> is a more traditional corporate structure<\/span>. Corporations can take advantage of specific tax credits, depending on\u00a0their activities and investments. C corporations<\/span> pay corporate taxes<\/span> on their corporate income. These corporations are taxed at their specific corporate tax<\/span> rates.\u00a0<\/p>\n

This can lead to double taxation<\/span> since the owners, or shareholders, also pay taxes on distributions. Shareholders can elect for S corp status<\/span> by filing Form 2553 with the Internal Revenue Service (IRS<\/span>). The IRS<\/span> will then allow the S corporation<\/span> to pass-through profits and losses to the owner\u2019s personal <\/span>tax return<\/span>, avoiding double taxation<\/span>.<\/p>\n

Another type is the closed corporation. Unlike standard corporations, closed corporations have a limited number of shareholders. They do not adhere to the same stringent management structures<\/span>. Instead of a board of directors<\/span>, shareholders manage the business.<\/p>\n

Nonprofit<\/span> Corporations<\/h2>\n

A\u00a0nonprofit<\/span> corporation<\/a>\u00a0is formed with the aim of fulfilling a charitable or educational purpose. They can also fulfill a literary, religious, or scientific purpose. A nonprofit<\/span> corporation can request charitable donations from the public. They can also seek to raise funds by seeking private grant money from companies and individuals.<\/p>\n

For those looking to start a tax-exempt<\/span> organization, a nonprofit<\/span> organization is the way to go. While they do earn income, it\u2019s reinvested into their mission. After meeting specific criteria, the IRS<\/span> can grant them tax-exempt<\/span> status. This means they\u00a0don\u2019t pay income tax<\/span><\/a>, but they still must file an annual information return with the IRS<\/span>. This is one of the biggest benefits of nonprofit<\/span> corporations.<\/p>\n

Cooperatives<\/h2>\n

Cooperatives, or\u00a0co-ops<\/a>, are businesses owned and run by those who enjoy their services. Members of a co-op vote on business decisions and share profits. Co-ops might get tax benefits, like deductions or credits, depending on their activities and structure. They often focus on areas like agriculture, retail, or housing.<\/p>\n

A co-op is a business that is most associated with grassroots organizations. These businesses are owned and operated by the members of the co-op in a democratic fashion. Much of the time, consumers form a co-op when they want to create a friendlier place of business. As such, these organizations often spring up in the form of a grocery store or a child care center.<\/p>\n

There are some states that have written laws about the setup and operation of co-ops. If you would like to find out if your state has laws on co-ops, you should contact your secretary of state<\/span>.<\/p>\n

Learn More About Types of <\/span>Business Structures<\/span> by Talking to an Attorney<\/h2>\n

There are plenty of factors to take into consideration when choosing a business structure<\/span> for your startup\u00a0company. You may have questions about liability protection and business plans for future expansion. The best way to make an informed decision about your new company\u00a0is to speak with a\u00a0business organization lawyer.<\/a>\u00a0These attorneys can provide legal advice based on your specific situation.<\/p>\n\n\n

\n \n Was this helpful?<\/span>\n \n Yes<\/span>\n \n \n \n <\/path>\n <\/g>\n \n \n <\/rect>\n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n \n No<\/span>\n \n \n \n \n <\/g>\n \n \n \n <\/clipPath>\n <\/defs>\n <\/svg>\n <\/i>\n <\/button>\n <\/div>\n <\/span>\n