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Understanding the 5 Main Business Structures and Selecting Which Is Best for Your Business

Selecting the Best Structure for Your Business

So you want to start a business? Congratulations! Launching a new business can be both exciting and exhausting. There are so many factors to consider, so many decisions to make, so many milestones to meet. It can all feel a bit overwhelming if we are being honest. One of the most important decisions you will make regarding your business is how it will be structured for tax purposes. Your business structure will determine how often you are taxed and to what extent you are taxed. Ultimately, it has a large impact on your bottom line according to the IRS. 

Key Questions You Should Ask When You Are Selecting an Entity for Your Business

When you are considering your business structure, here are a few questions that will help you determine which entity most aligns with your business venture. 

  1. How much control do you desire?

  2. What costs are you able to assume for registration, startup, and launching?

  3. How many owners will your business have? 

  4. What are the requirements to maintain the business structure?

  5. What implications does this business structure have on your tax filings?

  6. Will you have people who partner with you? 

  7. Are you going into business by yourself? 

  8. Are you forming a non-profit or agency? 

  9. Is your business related to insurance or financial services?

An Overview of the Key Business Entities and Pros & Cons for Each Structure Type

The 5 Main Business Structures

  1. Sole Proprietorship

  2. Partnership

  3. Limited Liability Company

  4. Corporation

  5. Cooperative

Identifying Attributes of a Sole Proprietorship

A sole proprietorship is one of the easiest businesses to start, but it also carries some of the biggest risks. As a sole proprietor, you have total control over your business, and you have total liability for your business. This means if someone sues you, you could lose both business and personal assets. This business structure is often chosen because it doesn’t carry large up-front costs and allows you to open up shop relatively quickly.

Pros & Cons of a Sole Proprietorship

Pros: Total Control, Minimal Up-Front Costs, Quick Setup

Cons: Total Liability, Business & Personal Responsibility, High-Risk

Main Traits of a Partnership

Partnerships are businesses owned by two or more people. Partnerships fall into two categories; limited partnerships and limited liability partnerships. A limited partnership carries more risk for the partner who assumes the liability, while a limited liability partnership spreads liability across all partners equally.

Advantages & Disadvantages of a Partnership

Advantages: Additional Capital,  Combined Expertise & Multiple Skill Sets, Greater Range of Offerings Disadvantages: Distributed Liability (Maybe Unequally), Loss of Autonomy, Possibility of Partnership Conflicts

Definition of a Limited Liability Company

Limited Liability Companies (LLCs) are unique business structures at the state level. Each state decides which types of LLCs to offer for structuring purposes. States may also allow members to be individuals, corporations, other LLCS, and even foreign entities. You should consult your financial advisor about your state’s federal and state financial regulations.

There are exceptions to which types of businesses can form Limited Liability Companies. For example, most banks and insurance companies are restricted from forming a LLC.

For tax purposes, LLCs are divided into three main classifications:

-corporations (C-Corp and S-Corp)

-partnerships (domestic, 2+ members)

-single member LLCs or “disregarded entities” (taxes are filed as part of the owner’s tax return)

Benefits & Risks of a Limited Liability Company 

Benefits: Limited Liability, Avoiding Double Taxation, Tailored Management Structures, Fewer Regulations Risks: Risk for Loss of Limited Liability, Difficulty Obtaining Capital or Investors, Risk for Poor Management 

Overview of a Corporation

A corporation is a legal entity established with the purpose of operating for profit. These can be managed by individuals, agencies, and share or stock holders. Corporations can engage in contracts, investments, and lawsuits.

Positives & Negatives of a Corporation

Positives: Liability Protection, Capital Access, Added Tax Benefits Negatives: Rigid Formalities, Protocols, & Structures, Lengthy Application Process, Double Taxation

Synopsis of a Cooperative

A business cooperative is a multi-business-owned entity with the expressed goal of pooling resources to meet members’ social, economic, and cultural needs. All members in a cooperative share equal voting rights. These rights are not dependent on how many shares in the cooperative a member holds.

Ups & Downs of a Cooperative

Ups: Distribution of Costs, Greater Marketing Reach Downs: Decreased Control, Fixed Pricing

Closing Remarks on The 5 Main Business Structures

Opening a business is a big step. It is understandable that you may feel a bit overwhelmed, but don’t let that stop you from pursuing your dreams.

One of the best resources for answering any questions you have regarding business structures, taxation, specific state and federal tax laws, and more is your financial advisor. It is always a good idea to consult professional assistance when navigating business finances.

At TNH Financial Services, we help entrepreneurs just like you grow and thrive. If you’re looking for help with planning or launching your business, we would love to help you. To schedule a consultation, click here

Additional Resources for Further Study

IRS. (2019). Business Structures | Internal Revenue Service.

Porteous, C. (2020, March 18). A Beginner’s Guide to Small-Business Structures. Entrepreneur.

U.S. Small Business Administration. (2024, January 5). Choose a business structure. U.S. Small Business Administration; U.S. Small Business Administration.

Sarah Mays is a freelance writer for TNH Financial Services, LLC. She can be reached at 

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