The 4 Types of Business Structures in the US | Bookipi University
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4 types of business structures in the US: Which one is best for you?

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.

What are the advantages of being in a sole proprietorship?

  • Easy and cheap to set up
  • Full control
  • Keep all profit
  • Fewer legal obligations.
  • Easy to change structure later on

What are the advantages of being in a sole proprietorship?

  • Personal liability for all finances and risks
  • Increases difficulty in raising finances
  • No back-up in the case of illness.

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.

What are the advantages of being a partnership?

  • Additional partners means greater skill set and capital
  • Less personal responsibility
  • Easier to raise finance

What are the advantages of being a partnership

  • Shared control and decision making
  • Partnership agreement usually necessary
  • More costly to set up and manage

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.

What are the advantages of being an LLC?

  • Members are protected from personal legal liability
  • Flexible tax options can be taxed as a sole proprietor, partnership or corporation
  • Flexible management can by all owners certain members or non-members

What are the advantages of being an LLC?

  • Cannot pay yourself wages as a member
  • Not as likely to receive financial capital compared to corporations
  • Unless you are the only member, the business ownership is shared with all members (con also be a pro)
  • Many states hax on LLC’s either based a flat fee revenue or

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.

What are the advantages of being a corporation?

  • Unlimited business lifespan
  • Ownership can be easily transferred
  • Easier to raise finance
  • Corporation tax rates are lower, so it’s financially sustainable when the business earns over a certain amount
  • More flexible business expansion

What are the advantages of being a corporation?

  • Cannot distribute any losses, only profits
  • Less control as directors and shareholders must agree on business decisions
  • Higher set-up and ongoing costs

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