In the early stages of a business, one of the most important decisions to be made is how you want it to be structured.
The business structure refers to the legal structure of your business.
In the United States, there are four main types of business structures. These include:
- Sole Proprietorship
- Partnership
- Trust
- Company
Depending on the size and type of business, you’ll choose one of the structures.
Each type has different responsibilities for owners, costs, legal and tax obligations.
When making a decision, you might find it helpful to weigh up the pros and cons of each structure
Here are the most common type of business structures in the US as well as the advantages and disadvantages of each:
Sole Proprietorship
A sole proprietorship is the simplest, most convenient and cheapest business structure.
The sole proprietor (or single owner) of the business controls and manages the business on their own and is entirely legally responsible.
Being the sole proprietor can be extremely rewarding, but it can come with significant pressure.
Partnership
A Partnership is can be formed when there are two or more people who operate a business and share the income.
This structure is useful to share skills and assets to improve the business.
The owners of a partnership also share the responsibility and risk associated with the business.
Limited Liability Companies
A limited liability company (LLC) is a hybrid business structure that combines the easy formation of sole proprietorships or partnerships, with the liability protection of corporations.
While an LLC requires articles of organisation to be filed with the state, they may elect to not pay federal taxes and instead list the profits and losses on the personal tax returns of the owners.
Whilst this type of structure does not protect against the wrongful action of businesses, it does protect personal assets from being used to pay debts.
LLCs and their owners (known as members) have different requirements and are taxed differently between each state, so it is important you do your research.
Corporation
A corporation is separate and distinct from its owners.
When a business owner/owners legally register their business as a corporation, they are not personally liable for the company’s debts.
This means if the corporation incurs debts or gets sued, it does not solely fall on the directors or shareholders.
This business structure is more costly and complicated to set up but can be beneficial for tax-purposes once the business starts turning over a certain amount.
This structure is also ideal for a business that want to be able to easily introduce or remove owners, employees, investors, and shareholders.
