The corporate structure that new business owners choose determines the legal, financial, and operational requirements of the business, as well as the amount of control and liability that the owners have. With so much at stake, new business owners have to understand the various types of corporate structures and choose the one that best accommodates their specific goals. Here’s an overview of the most common types of corporations.

What's in this article?

• Sole proprietorship
  
• Partnership
  
• Limited liability company (LLC)
  
• C corporation (C corp)
  
• S corporation (S corp)
  
• Non-profit corporation
  

Sole proprietorship

A sole proprietorship is the simplest type of business structure, where one person owns and operates the business. This structure provides total control and flexibility for the owner, but it also exposes them to unlimited personal liability for the business’s debts and obligations.

Here are important details to know about sole proprietorships:

• Unlimited personal liability
  A sole proprietorship does not create a separate legal entity from the owner, which means that the owner is personally liable for all the business’s debts and obligations. This includes lawsuits, damages, and any other legal claims that may arise.

• Taxation
  The business income is reported on the owner’s personal income tax return, and they are responsible for paying all taxes owed on the business income. The owner must also pay self-employment taxes on the net income of the business.

• Control and flexibility
  The sole proprietor has unmitigated control and decision-making power over every part of the business. They can make decisions quickly without having to consult with partners or shareholders.

• Capital and financing
  Since a sole proprietorship is a one-person business, it may be difficult to obtain financing or attract investors. The owner frequently has to rely on personal savings, loans, or credit to fund the business’s operations.

• Lack of perpetual existence
  A sole proprietorship may cease to exist upon the death or incapacity of the owner. The business assets and liabilities are then transferred to the owner’s heirs or estate.

• Record-keeping
  Sole proprietors are responsible for keeping accurate records of all financial transactions and maintaining separate bank accounts for the business, which helps to separate business and personal finances and simplify tax reporting. But sole proprietors do have the option of working with financial professionals to help manage these concerns.

Sole proprietorships can be a good option for small businesses or individuals who want to start a business without the formalities of other business structures.

Partnership

A partnership is a business structure where two or more people share ownership of the business. Here are a few key points to know about partnerships:

• Types of partnerships
  There are two main types of partnerships: general partnerships and limited partnerships. In a general partnership, all partners have equal control and are responsible for the business’s financial and legal obligations. In a limited partnership, there are general partners who have unlimited liability and limited partners who invest in the business but have limited liability.

• Shared profits and losses
  Partnerships are based on shared profits and losses. The profits are distributed among the partners according to the partnership agreement, while the losses are shared by the partners according to their percentage of ownership.

• Legal liability
  Partnerships do not create a separate legal entity from the partners, and each partner is personally liable for the business’s debts and obligations. This means that each partner may be required to use their personal assets to pay off business debts.

• Partnership agreement
  It’s important to create a partnership agreement that outlines the terms of the partnership, including each partner’s role and responsibilities, profit distribution, the decision-making process, and how disputes will be resolved.

• Taxation
  Partnerships do not pay taxes on their profits. Instead, each partner is responsible for reporting their share of the partnership income on their personal tax return and paying taxes on it. Partnerships are also required to file an informational tax return with the IRS.

• Capital and financing
  Partnerships can be a good option for businesses that require more capital than a sole proprietorship can provide. Partners can contribute funds to the business, and the partnership can also take on debt.

Limited liability company (LLC)

An LLC is a hybrid business structure that combines the liability protection of a corporation with the tax benefits of a partnership. LLCs are a popular choice for businesses because they offer limited liability protection, pass-through taxation, and a high degree of flexibility in a number of areas.

Here are a few important points to know about LLCs:

• Limited liability
  One of the biggest advantages of an LLC is that it provides limited-liability protection to its owners, also known as members. This means that members are typically not personally liable for the business’s debts and obligations. There are exceptions, such as when members personally guarantee loans or act illegally or unethically.

• Pass-through taxation
  LLCs are taxed similarly to partnerships. This means that the business does not pay federal income taxes; instead, the company’s profits and losses are passed through to its members, who report their share of the income or loss on their personal income tax returns. This helps to avoid double taxation.

• Management and control
  LLCs offer a great deal of flexibility in terms of management and control. Members can choose to manage the business themselves, or they can appoint a manager to oversee operations. Additionally, LLCs can have a single member or multiple members, which means that they can be owned by an individual or a group of people.

• Operating agreement
  An LLC should have an operating agreement that outlines the company’s internal management, ownership, and decision-making process. This document can prevent disputes and misunderstandings between members and be customised to meet specific business needs.

• Capital and financing
  LLCs can issue ownership interests to raise capital and take on debt like a corporation. They can also issue different classes of ownership interests to provide for different levels of control or economic rights.

• Perpetual existence
  LLCs can continue to exist beyond the departure or death of any one member. This means that the LLC can provide continuity and stability to the business beyond the scope of the involvement of its founders.

C corporation (C corp)

A C corporation, or "C corp", is a legal entity that is separate from its owners, providing limited-liability protection to its shareholders. It is the most common type of corporation and is required to pay taxes on its profits. This structure is suitable for larger businesses with multiple shareholders, as it allows for unlimited growth potential and access to capital.

Here are a few important aspects of C corps to know:

• Limited-liability protection
  C corps offer limited-liability protection to their shareholders; shareholders’ personal assets are typically not at risk for the business’s debts and obligations.

• Double taxation
  C corps are taxed at the corporate level, and the shareholders are also taxed on any dividends or distributions that they receive. This can result in double taxation, which can be a disadvantage for some businesses.

• Management and control
  C corps are managed by a board of directors, who are elected by the shareholders. The board is responsible for making major decisions about the company’s direction and strategy.

• Stock and ownership
  C corps can issue different classes of stock, which can provide different levels of control or economic rights to the shareholders. Additionally, C corps can have an unlimited number of shareholders.

• Capital and financing
  C corps can issue stock to raise capital, and they can also take on debt like any other corporation. Additionally, C corps can go public through an initial public offering (IPO), which can provide access to significant amounts of capital.

• Perpetual existence
  C corps can continue to exist beyond the departure or death of any one shareholder.

C corps are advantageous for businesses that want to provide limited-liability protection to their shareholders and have access to significant amounts of capital. However, double taxation can be a disadvantage for some businesses, and the strict regulatory and reporting requirements can make it challenging for some smaller businesses.

S corporation (S corp)

An S corporation, or "S corp", is similar to a C corp, but it is designed for small businesses with a limited number of shareholders. It allows the business to avoid double taxation, since the profits and losses of the corporation are passed through to the shareholders’ personal tax returns. S corps can be a good option for small businesses that want to avoid double taxation and provide limited-liability protection to their shareholders, while the strict shareholder requirements and limitations on stock issuance are drawbacks for some businesses.

Here are some important things to know about S corps:

• Pass-through taxation
  S corps are not taxed at the corporate level. Instead, to avoid double taxation, the profits and losses are passed through to the shareholders, who report the income on their personal tax returns.

• Shareholder requirements
  S corps have strict requirements for shareholders, including limitations on the number and type of shareholders. S corps cannot have more than 100 shareholders, and they must all be individuals, certain trusts, or estates. Additionally, shareholders must be US citizens or residents.

• Limited-liability protection
  Similar to C corps, S corps offer limited-liability protection to their shareholders, meaning that shareholders are not personally liable for the business’s debts and obligations.

• Management and control
  Like C corps, S corps are managed by a board of directors, who are elected by the shareholders. The board guides all major decisions regarding the company’s direction and strategy.

• Tax status
  To become an S corp, the corporation must file Form 2553 with the IRS and meet all the requirements. The corporation can terminate the tax status, or the IRS can revoke it, if the requirements are not met.

• Capital and financing
  S corps can issue stock to raise capital, and they can also take on debt like any other corporation. However, there are limitations on the types of stock that can be issued, which can impact the ability to raise capital.

Non-profit corporation

A non-profit corporation is a special type of corporation that is formed for charitable, educational, or religious purposes. This structure is exempt from federal and state income taxes and allows for tax-deductible donations to the organisation.

Here are a few important attributes of non-profit corporations:

• Tax-exempt status
  Non-profit corporations are exempt from federal income tax and may also be exempt from state and local taxes. Additionally, donations made to non-profit corporations are typically tax deductible for the donor.

• Charitable purpose
  Non-profit corporations must be formed for a charitable, educational, or religious purpose. They must operate for the public benefit, and their activities cannot primarily benefit private individuals or shareholders.

• Governance
  Non-profit corporations are governed by a board of directors, who are responsible for overseeing the organisation’s activities and ensuring that it is operating in accordance with its mission and goals.

• Fundraising
  Non-profit corporations rely on fundraising to support their activities and operations. This can include donations from individuals, corporations, and foundations, as well as grants and fundraising events.

• Financial reporting
  Non-profit corporations must file annual financial reports with the IRS, which are made publicly available. Additionally, they must maintain accurate financial records and provide transparency about their activities and use of funds.

• Perpetual existence
  Non-profit corporations can continue to exist beyond the departure or death of any one member.

Overall, non-profit corporations are a good option for organisations that want to operate for a charitable, educational, or religious purpose and provide tax-exempt status to their donors. However, non-profit corporations must adhere to strict governance, fundraising, and financial-reporting requirements.

Because there are specific parameters about which businesses qualify for non-profit status, it’s important to consult with legal and financial professionals to determine if a non-profit corporation is the right choice for your organisation.

17. Consider business loans

Using business loans as a part of your financial strategy can be a powerful step to expedite your business growth. Here's how to approach this step:

• Determine your need for a loan: Before jumping into the loan application process, assess whether you have a genuine need for a loan. Maybe you need funds for expanding your operations, buying equipment, increasing inventory, hiring staff or smoothing out cash flow. Getting clear about your business's financial needs can help you make a more informed decision about applying for a loan.

• Research different types of loans: There are different types of loans available for businesses, from traditional bank loans and Small Business Administration (SBA) loans to alternative online loans and lines of credit. Each type comes with its own terms, interest rates and requirements. The right choice for you will depend on your specific needs, financial situation and the stage of your business.

• Consider eligibility requirements: Lenders have varying criteria for approving loans. These can include factors such as your credit score, business revenue, the profitability of your business and how long you've been in operation. Before applying for a loan, carefully check these criteria to see if you qualify.

• Prepare your loan application: Once you've chosen a type of loan and confirmed that you meet the lender's criteria, the next step is to prepare your loan application. This involves compiling financial documents such as your business plan, financial statements, tax returns and details of your collateral. You may also need to present a plan outlining how you intend to use the loan and how you will repay it.

• Compare loan offers: If your loan application is approved, you may receive offers from different lenders. Consider each offer's terms carefully, including the interest rate, loan amount, loan term and any additional fees. Be sure you understand the total cost of the loan and how the repayment terms align with your business's financial projections.

Taking on debt is a serious commitment that demands careful planning and consideration. For additional guidance throughout the process, consult with a financial advisor or mentor.

There's no easy shortcut to starting a business. Cutting corners or skipping steps in the early days can create unnecessary friction, confusion or even legal liability down the road. But while much of the work that goes into starting a new business might seem tedious, it's not overly complicated. If you take a thoughtful and methodical approach to this process, and address each step in the correct order, you'll build a foundation that can support all the goals and dreams you have for your business – exactly what motivated you to begin this journey in the first place.