Types of Businesses: 7 Common Business Structures

A business is any organization in which a person or a group of people pool resources together to create something of value for the wider public. There are different types of businesses and distinct ways to structure a business for legal and tax purposes. Different forms of business arrangements suit different types of needs for entrepreneurs and investors.

You can take different approaches to form and maintain a business. Keep these seven types of business structures in mind as you pursue your own entrepreneurial goals:

1. 1. C corporation: When you form a C corporation or C corp, you hand over most of the ownership stake in your company to a group of shareholders. This business structure shields both you as a part owner and all of your fellow shareholders from having any personal liability in the event of a lawsuit, since the C corp exists as a separate legal entity. For tax purposes, you’ll need to pay the business’ corporate taxes as well as your own personal income taxes.
2. 2. General partnership: On the positive side, general partnerships are among the easiest types of businesses to form. In this structure, you go into business with a select group of general partners and have a high amount of flexibility. On the negative end, each partner has unlimited liability—meaning the government can seize assets from any of their personal bank accounts for damages in the event of a lawsuit or to cover unpaid debts for the company.
3. 3. S corporation: This type of corporation (also known as an S corp) has a board of directors, but the government allows these people to pay all the taxes for their business on their personal returns. This enables S corps to avoid the double taxation C corps face. To qualify for this designation, your S corp must have fewer than one hundred total shareholders.
4. 4. Limited liability company (LLC): The legal structure of an LLC offers maximum liability protection for all of its members when it comes to personal assets. LLCs also offer a great degree of flexibility when it comes to paying taxes. Members can decide whether to pay corporate tax rates for their LLCs or pay via their income tax returns so long as they provide appropriate documentation and reasoning as to why they chose one option over the other.
5. 5. Limited partnership: When forming a new business partnership, you and your colleagues might want to shield yourself from some of the liability common to general partnerships. Limited partnerships allow you to do so, preventing your personal assets from coming on the table in the event of a lawsuit or another similar unfortunate circumstance.
6. 6. Nonprofit corporation: This form of business organization does not seek to generate profits for owners or shareholders. In general, nonprofits aim to contribute to the broader public good. To incentivize this, the Internal Revenue Service (IRS) grants a tax-exempt status to nonprofit corporations.
7. 7. Sole proprietorship: A single entrepreneur or small business owner can form their own company as a sole proprietor. In this arrangement, the IRS taxes the owner’s personal income and business income as if they were one and the same. A sole proprietorship helps the proprietor avoid double taxation as would be the case in a C corporation, for instance. In the event of a lawsuit, however, it’s possible to seize the personal assets of the proprietor.

To decide which type of business structure best suits your needs, you will need to weigh certain variables. Here are three key elements to consider:

1. 1. Business tax requirements: The form of business you file determines what kind of state and federal tax treatment you will receive. For instance, some business entities must undergo a process of double taxation. In other words, owners pay taxes on the business’ income as well as on their personal income statements. Other business structures allow investors and owners to only pay one round of taxes on their personal tax returns.
2. 2. Legal liability: Different types of business structures allow for different levels of liability protection. Some provide you with a great deal of protection, ensuring you won’t need to worry about someone seizing your personal assets in the event of a lawsuit. Others do not afford you with this type of protection.
3. 3. Number of owners and investors: When doing business, you have the option to find partners or go it alone. There are multiple different ways to pursue an individualized course or group venture. In general, the more partners or investors there are, the more access you’ll have to business loans. Similarly, a more solitary entrepreneurial effort on your part will afford you more control over your business than you would have had with a larger team.
4. 4. State regulations: When you form a business of nearly any type, the law requires you to file at least some information with the state—more specifically, the secretary of state in the state in which you hope to do business—to obtain a business license. These articles of incorporation can include corporate bylaws, information about your board of directors, and other information necessary to solidify your company as a legal entity.

MasterClass at Work is the learning platform to help unlock the full potential of your employees and inspire a learning lifestyle in everyone. From negotiation to mindfulness to baking—these are just a few things your teams can explore.