One of the first steps to starting a business is picking a business structure, or business formation. The structure you choose impacts how you’ll pay taxes and how you’ll go about protecting your personal assets.
Types of business structures
There are four main types of business structures: Sole proprietorship, partnerships, limited liability companies (LLC) and corporations.
Structure
Best for…
Description
Requires Employer ID Number (EIN)
Sole proprietorship, or sole trader
Running your business on your own, with a simple setup with limited paperwork.
You’re going it alone with complete control over your business. If you do business activities, you’re automatically considered a sole proprietorship
Not required, personal taxes.
Partnerships (LP, LLP and LLLP
Running a business with other owners.
Two or more people can enter into a partnership, sharing the money, property, profits and losses of the business.
Yes, a Partnership Tax ID EIN.
Limited liability companies (LLC
Getting personal liability protection, and for a business with a more relaxed structure than a corporation.
Limited liability protects your personal assets. Can be single-member, corporation or partnership.
Will require an EIN if the LLC has employees, or is a single-member LLC.
Corporations (C corp, S corp, benefit, non-profit
For large-scale businesses and can offer the most protection for your personal assets and establish an easily scalable business.
A business owned by its shareholders.
Yes, a Corporation’s Tax ID EIN
How to choose your business structure type
There are multiple factors to consider before you decide which business structure to choose.
Liability risk. If you want your personal assets to be separated from your business, consider an LLC or a corporation. Sole traders get no legal distinction between business and personal assets.
Taxes. Your business structure will determine how you pay your taxes and whether you need an EIN — a tax identification number you’ll need to file a business tax return. Sole proprietors don’t need an EIN because they file business taxes alongside their personal returns, whereas LLCs and corporations need one.
Preferred ownership. If you want full control over your small business, a sole proprietorship is the easiest path to take that doesn’t require registration or dealing with shareholders. However, a single-member LLC can still offer control and liability protection.
Long-term goals. If you have plans to sell or scale your business significantly in the future, a corporation may be the best choice since it can sell stock and attract investors.
Administrative costs. Corporations have more extensive paperwork and record-keeping requirements, which can eat up a lot of time and money when forming a business. Those who are starting a business on their own may consider a sole proprietorship when first starting out.
Talk to professionals. If you’re looking for in-depth information about business taxes and liability protection, you can consult tax professionals and legal advisors.
LLC vs. sole proprietorship
If you’re already doing business and haven’t registered it with any government agency, your business is already considered a sole proprietorship, also known as a sole trader. With this structure, there is no legal distinction between the business and the owner. The owner is personally responsible for all aspects of the business, including its profits, debts and liabilities — which creates some risk for the owner’s personal assets.
A limited liability company (LLC) offers exactly what the name suggests: Liability protection. It offers its business owners limited liability protection, which means that the business owners aren’t personally responsible for the business’ debts or legal liabilities.
Because an LLC offers that limited liability protection, many businesses that start off as sole proprietors often opt to become an LLC.
LLC vs. corporations
Deciding between an LLC and a corporation ultimately depends on your goals and who you want the business owner(s) to be.
The main difference between an LLC and a corporation is that an LLC is owned by one or more people, and a corporation is owned by shareholders.
Both LLCs and corporations offer personal liability protection, meaning that your personal assets are tied to the business. For example, if your business were to be sued, your personal property wouldn’t be impacted.
4 common types of corporations
There are a few common types of corporations that work slightly differently — mostly when it comes to taxes:
C-corporation. This is the most common type of corporation, and it’s run by shareholders with limited liability for the shareholders and goes on indefinitely. But this structure can face double taxation, since the company pays corporate taxes on profits, and then the shareholders have to pay personal taxes on their dividends.
S-corporation. This structure allows you to avoid double taxation by passing on the profits directly to the shareholders, meaning they only have to pay income taxes. Some states might have limits on S-corps and requirements for who can be a shareholder and is limited to 100 shareholders.
B-corporation. B-corps are for-profit businesses with a mission to do public good. They’re taxed the same way as a C-corp, but shareholders are also responsible for holding the company accountable for its mission as well as its profits.
Nonprofit corporation. Also known as a 501(c)(3), nonprofits are structured like a C-corp but work solely to benefit the public good. Many qualify for tax-exempt status under certain conditions, meaning they don’t have to pay any taxes on profits they make — but there are restrictions on how they can use those funds.
Bottom line
Consider your legal responsibility, tax obligations and the work it takes to set up and maintain different business structures before you decide which one to choose. After you’ve picked your business structure, you’re ready to start thinking about how to create a business plan — which you need to attract investors or apply for a business loan.
Bethany Hickey is a personal finance writer at Finder, specializing in banking, lending, insurance, and crypto.
Bethany’s expertise in personal finance has garnered recognition from esteemed media outlets, such as Nasdaq, MSN, Yahoo Finance, GOBankingRates, SuperMoney, AOL and Newsweek. Her articles offer practical financial strategies to Americans, empowering them to make decisions that meet their financial goals. Her past work includes articles on generational spending and saving habits, lending, budgeting and managing debt.
Before joining Finder, she was a content manager where she wrote hundreds of articles and news pieces on auto financing and credit repair for CarsDirect, Auto Credit Express and The Car Connection, among others.
Bethany holds a BA in English from the University of Michigan-Flint, and was poetry editor for the university’s Qua Literary and Fine Arts Magazine.
Here’s how we rate business checking accounts, covering what we look for in fees, cash deposit, opening requirements, transaction limits, APY and account features.
SoFi and Capital One are both good picks for different reasons. SoFi is best for everyday banking, but Capital One has more account options and branches.
How likely would you be to recommend finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Advertiser Disclosure
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
