Establishing a business starts with an idea. You need something you are passionate about or something you know you can commit to.

But if you want to go further and turn your idea into reality, you need to put your feet on the ground. You have to deal with the legal and financial requirements needed to open your business and keep it running.

One of your starting points is deciding on a business structure. It dictates most, if not all, of your day-to-day operations, so it’s important to choose the right one for your business.

What is a sole proprietorship? What is the difference between LLC vs. S Corp? Read on and find out.

What Is a Business Structure?

A legal business structure determines how a business owner (or owners) runs their business. Every business owner needs to choose a legal structure to register with the state.

A legal structure for your business determines the kinds of taxes you have to pay, the paperwork you need to file, the risk of liability you’ll have to take, and even your ability to raise money.

It’s critical to consider carefully your business structure, as it will affect all future decisions and options in running your business.

Main Types of For-Profit Legal Business Structures

There are several types of for-profit business structures today. These mainly differ in the size of the business or company, the types of taxes you need to pay, and the level of liability the owners need to shoulder.

Sole Proprietorship

A sole proprietorship is probably the most accessible business structure to form. As the name suggests, the ownership of a business belongs to a lone individual. It also offers complete managerial control to the owner.

Most businesses start as a sole proprietorship. You just need to start selling your products and services to become a sole proprietor. There is no need to produce a separate business entity, nor do you need a business bank account.

If you ever decide to end the business for whatever reason, you can do so immediately. You just need to cease operations altogether. There is no need for extensive paperwork, as you have no partners or board of directors to appease.

However, the major disadvantage of a sole proprietorship is the owner will also be liable for the obligations and debts of the business, as your personal and business finances are one and the same.

Partnership

If a sole proprietorship is the most straightforward business structure to form for one person, the same goes for a partnership, except a partnership can involve two or more people. In most cases, the partners will share both profits and liabilities in their business.

There are three types of business partnerships: general partnerships (GP), limited partnerships (LP), and limited liability partnerships (LLP). The structure and share of responsibility will depend on a partnership agreement upon which all partners should agree.

A general partnership works much like a sole proprietorship, except with more people. Each partner shares their business finances with their personal finances. Due to this implication, other business owners prefer LPs and LLPs to protect them from personal liability.

Limited partnerships have two types of partners: a general partner and a limited partner. A general partner has more stakes in the business and generally involves themselves in its day-to-day operations. On the other hand, a limited partner might have invested in the business but has less liability, involvement, and control of its operations.

A limited liability partnership bears similarities with a limited partnership, except that all partners enjoy limited liability.

Partnerships are common structures for businesses with multiple owners and groups of professionals, such as lawyers or accountants.

Corporation

A corporation is a business entity completely separate from its owners. It can take legal and financial actions as itself. It files taxes, earns profits, and experiences losses under its own name, saving its founders or owners from personal liability. It can enter into contracts and business agreements, sue other entities, and be sued in return.

However, forming and maintaining a corporation requires tremendous costs and effort. You need to maintain meticulous records and experience double taxation (save for the S-corporation), making it suitable for medium to large businesses with highly-organized structures and stable profits.

• C Corporation. A C-corporation comes to mind when thinking of a traditional corporation. It is wholly independent and protects its owners from personal liability.

However, corporations need to pay income tax on their profits. At times, they can experience double taxation, as they also need to pay taxes when they pay dividends to shareholders.

• S Corporation. An S corporation enjoys the independence of a corporation while helping business owners avoid the disadvantage of double taxation. It allows some profits and losses to immediately go to the owner’s personal account without paying corporate taxes.

Not every business may qualify as an S corporation, so it’s best to consult the IRS requirements to see if your business is eligible.

• B Corporation. A benefit corporation or a B corporation is similar to a C corporation in taxation, save for its purpose, transparency, and accountability requirements. B corporations are often the structure of choice for advocacy-driven businesses and organizations.

B corporations are still for-profit businesses, but they must adhere to various ethical or environmental standards to secure funding and avoid scrutiny.

Limited Liability Company

A limited liability company rides the line between a partnership and a corporation, making it a popular choice for many businesses today. It offers protection from personal liability without needing to pay high corporate taxes.

In an LLC, profits and losses immediately go to your personal account. However, the members of an LLC are self-employed under the law and need to pay self-employment tax contributions to Medicare and Social Security.

Depending on the state, LLCs may need to be dissolved and then reformed whenever a member leaves or joins the company. Members can avoid this step by specifying an agreement for transferring ownership.

The Bottom Line

Choosing the proper legal structure for your business affects a significant part of your operations. It’s vital to assess your needs and capabilities before selecting one.

If you already have an established business and a working structure, don’t be afraid to reassess. Various structures can offer considerable benefits depending on the stage of your business. Sometimes, making a change can bring significant advantages.