Which Structure is Best for Your Small Business? (2024)

One of the most challenging aspects of starting a small business is knowing what structure will serve you best. There are several types of business structures, and each has its own advantages and disadvantages. You must consider the industry your business is in, the number of owners involved, the desired liability and tax implications, and how you plan to grow.All of these factors determine which business structure is right for you.

In order to help you with your decision, we explore the most popular structures for small businesses, who they suit best, and the pros and cons of each.

Sole Proprietorship

A sole proprietorship is your starting point in business structures. In fact, you are automatically considered a sole proprietorship once you begin your business activities but don’t register as any other structure.

A sole proprietorship can be a steppingstone for owners who want to test their business before becoming more formal. But for many small businesses, a sole proprietorship may be perfect.

What is it?

A business owned and operated by a single individual

Who is it good for?

A sole proprietorship is great for low-risk businesses with minimal legal requirements

Pros

• Simple and inexpensive to set up
• Owner has full control
• Owner receives all profits

Cons

• Owner has personal liability for debts and obligationsof the business
• It can be hard to raise money sinceyou cannot sell stock shares
• It can be hard to get loans because banks are often hesitant to lend to sole proprietorships

Companies that started as sole proprietorships

• eBay
• Walmart
• Marriott Hotels

Partnership

Partnerships are more complex than sole proprietorships. For one, they are business structures made up of two or more individuals. There are also three different types of partnerships, which are primarilybased on how you want to handle liability for the business.

What is it?

A business owned by two or more individuals who share profits, losses, and responsibilities

Who is itgood for?

A partnership is great for small businesses that have multiple owners who pool their skills, resources, and expertise

What are the different types?

• General Partnership: All partners share equal liability for business debts
• Limited Partnership (LP): Allows forboth general partners (with full liability) and limited partners (with limited liability, but also limited involvement)
• Limited Liability Partnership (LLP): All partners have limited liability, and some or all partners can have limited involvement in management

Pros

• Relatively easy and inexpensive to set up
• Shared ownership and control (can also be considered a “con”)
• Shared profits, which can provide a financial incentive for all partners to really work together

Cons

• Shared liability makes each partner is responsible for the debts and obligations of the business
• It can be difficult to transfer ownership or leave the partnership
• It can be hard to raise money because, like sole proprietorships, partnerships are not typically able to sell stock shares

Companies that started as partnerships

• Microsoft
• Apple
• Twitter
• Hewlett-Packard

Limited Liability Company (LLC)

A limited liability company (LLC) gives you some of the benefits of a partnership while also giving you some of the benefits of a corporation.

What is it?

A business structure that protects owners from personal responsibility for the company’s debts or liabilities.

Who is it good for?

An LLC is great for small business owners who want some liability protection along with flexibility with both taxes and management.

Pros

• Profits and losses are passed through to personal income, so owners do not face corporate taxes
• Owners are protected from personal liability in case the business faces bankruptcy or lawsuits
• Owners pay a lower tax rate than they would with a corporation
• Fewer formalities compared to corporations

Cons

• Members of an LLC are considered self-employed and must pay taxes for Medicare and Social Security
• Some states require an LLC to be dissolved and reformed whenever a new member joins or a current member departs

Companies that started as LLCs

• Pepsi-Cola
• Nike
• eBay
• IBM

Corporation

A corporation is the most complex structure a small business owner can consider. It is owned by shareholder(s) who have limited liability for the company. They oftenelect a board of directors to oversee the business’ activities. There are two different types of corporations to consider that are centered around the number of shareholders and how they handle taxation.

What is it?

A legal entity that is separate and distinct from its owners.

Who is it good for?

A corporation is suitable for stable businesses with complex ownership structures, strong potential for growth, and need for liability protection.

What are the different types?

• C Corporation (C-Corp): Owned by multiple shareholders
• S Corporation (S-Corp): Often smaller businesses that are owned by an individual shareholder

Pros

• Owners are generally protected from personal liability in case the business faces bankruptcy or lawsuits
• Corporations can exist indefinitely, regardless of changes in ownership or when shareholders depart
• Easier access to loans and investment largely due to the perceivedstability of corporations
• Easier access to capital since corporations can issue stocks and bonds

Cons

• Higher cost to form and run than other business structures
• More rigid rules and regulations than other business structures
• C-Corps have double taxation, which means profits are taxed at both the corporate and individual levels
• Dilution of control since shareholders have a say in the company’s decisions

Companies that started as corporations

• General Motors
• Amazon
• Exxon
• JP Morgan Chase

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