When starting a business, one of the first decisions you need to make is how to structure it. There are five main types of small businesses: sole proprietorship, partnership, corporation, S corporation, and limited liability company (LLC). Each type has its own advantages and disadvantages, so it's important to understand the differences before making a decision. A sole proprietorship is the most basic type of business structure.
It is owned by a single person who is responsible for all business transactions, debts, and lawsuits. The owner reports all taxes as personal taxes and can deduct most business losses from their return. A partnership is owned by two or more people who share responsibility for the financial and legal aspects of their business operations. General partners can deduct most business losses from their personal tax returns.
An LP (limited partnership) divides financial and legal responsibilities between general and limited partners within an agreement. A corporation, sometimes referred to as Corporation C, is an independent legal entity owned by shareholders. It has expensive administrative fees and complex tax and legal requirements, so it's generally suggested for larger, established companies with several employees. A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability characteristics of a corporation and the tax efficiencies and operational flexibility of a partnership.
The “owners” of an LLC are referred to as “members” and they report profits and losses on their federal personal tax returns. A cooperative is owned by its members who have voting power to control the management of the cooperative. Members join the cooperative by buying shares, although the number of shares they own does not affect the weight of their vote. When deciding which type of small business is right for you, it's important to consider your goals, resources, and industry.
Each type has its own advantages and disadvantages, so it's important to understand the differences before making a decision.