Deciding which type of business structure you’d like to employ in your entrepreneurial venture is a very important decision. Some of the business structures are more suitable towards raising capital, while others offer flexibility and fewer demands on an entrepreneur’s time. So which option is the best for your business? Let’s explore your options.
Business Structure Option #1: Sole Proprietorship
A sole proprietorship is a business that runs under either the entrepreneurs’ name or a fictitious one, and who pays taxes on their business profit using their own personal tax return. The most common of business structure, sole proprietorships account for more than three quarters of all businesses in the US, according to U.S. Census data from 1990-2004 (see: PDF). Yet these business owners are also only making a fraction of the net income that corporations are making, and therefore aren’t the best choice for every entrepreneur.
Business Structure Option #2: Partnership
There are two different kinds of partnership business structures: the general partnership and the limited partnership. An advantage that a partnership provides (other than the fact that there are two people sticking out their necks to begin a business) are that any taxes paid on the business aren’t paid at the partnership level, but rather by each partner, and only as a percentage of their business ownership.
Business Structure Option #3: Corporation
Corporations aren’t as commonly-used of a business structure as the others in this list, yet they create more profit than any other business entity out there (again, according to U.S. Census Data; see above). Any business that needs to raise capital will most likely choose a corporate or LLC business structure, because they both allow for a wide variety of financing options.
Business Structure Option #4: Limited Liability Company
An LLC is very similar to a corporation, in that it requires much of the same paperwork — and more. What’s different is that an LLC can choose to either run its business in a variety of different ways for taxation purposes: if there is only one person running the LLC for instance, the taxes for a sole proprietorship apply. However, the rules regarding a sole proprietor’s liability change completely with an LLC, making it a viable option for those wanting more flexibility when it comes to income creation, profits, and liability options.
Business Structure Option #5: Nonprofit Corporation
There are as many different types of nonprofits as there are business structures, but for the most part when discussing nonprofits with regards to entrepreneurship, we mean nonprofit corporations: those companies that aren’t for-profit, but are run like for-profit companies in order to keep their membership informed and apprised of where their donations, gifts and grants are going to.