Over my career, I’ve had the opportunity and pleasure of working with hundreds of businesses. What is no surprise is that no two businesses are the same. When our firm discusses with owners about their business and its unique needs, we often discuss the business structure to make sure that it is set up for success in the best possible outcome.
The land of business structure can be tricky to navigate. Each unique structure can offer different levels of protection, taxation, and formalities. The most common structures that we work with include sole proprietorships, partnerships, Limited Liability Companies (LLCs), S Corporations (S Corps), C Corporations (C Corps), and cooperatives. Each structure offers different benefits and potential drawbacks depending on the specific circumstances of the business and its owners.
A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the business. It offers ease of formation, as there are minimal legal requirements and costs involved in starting the business. The owner has complete control over decision-making and retains all profits generated by the business. Sole proprietors may find it harder to raise capital and access financing, and they are subject to self-employment taxes on the business’s income. Despite the challenge of unlimited liability, sole proprietorships are ideal for small, low-risk ventures where the owner prefers simplicity and are the most common in the United States, with 73% of all businesses falling under this structure.
A partnership is a business structure where two or more individuals (or entities) agree to share ownership, responsibilities, and profits. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP). Within the structure, there are two types of partners: general partners (GP), who are involved in the management and assume personal liability for business debts, and limited partners (LP), who would be liable only up to their investment amount and have no management responsibility. Partnerships offer flexibility in terms of management and the ability to pool resources and expertise. Although partnerships are relatively easy to form and operate, they often are a proving ground for groups wanting to test business ideas before formalizing the structure.
A Limited Liability Company (LLC) is a flexible business structure that combines the benefits of both corporations and partnerships. All members enjoy limited liability, meaning their personal assets are generally protected from the company’s debts and legal obligations. LLC offer pass-through taxation, where profits and losses pass through to members’ personal tax returns, which avoids double taxation. LLCs offer flexibility in management and have fewer formalities compared to corporations. LLCs may face higher self-employment taxes, and their rules and fees vary by state, which can complicate formation and compliance.
A C Corporation (C Corp) is a formal business structure where the company is considered a separate legal entity from its owners, providing strong liability protection for shareholders. One key advantage of a C Corp is its ability to raise capital by issuing unlimited shares of stock, making it attractive to investors and suitable for companies with growth ambitions. The structure ensures perpetual existence, meaning the corporation continues even if shareholders leave or sell their shares. C Corps face double taxation, where the company’s profits are taxed at the corporate level, and then shareholders are taxed again on dividends. Nonetheless, C Corps offer various tax benefits, such as the ability to retain earnings within the company and deduct business expenses such as employee benefits. C Corps require more formalities, such as holding annual meetings, maintaining detailed records, and following strict regulations, but are often preferred by larger businesses or those seeking external investors.
An S Corporation (S Corp) is a special type of corporation that allows profits, and some losses, to pass through directly to the owners’ personal income without being subject to corporate tax rates, thereby avoiding the double taxation faced by C Corporations. To qualify, an S Corp must meet certain IRS requirements, such as having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and issuing only one class of stock. Under this structure, there is the benefit of limited liability protection and it can help owners reduce their self-employment tax burden. S Corps come with stringent regulations, such as stricter eligibility criteria and the requirement to follow corporate formalities, including holding annual meetings and maintaining records. S Corps are a popular choice for small to medium-sized businesses that want the tax benefits of a pass-through entity combined with the legal protections of a corporation.
A cooperative (co-op) is a business structure that is owned and operated by its members, who use its services and share in the profits. Unlike traditional for-profit businesses, a co-op is typically formed to serve the mutual benefit of its members. Each member of a cooperative has an equal say in decision-making, often following a one-member, one-vote system, regardless of the size of their investment or involvement. Co-ops can take many forms and offer the advantage of shared risk and a focus on member benefit. The primary drawback to this structure lies in challenges raising capital and a more complex decision-making process.
The U.S. Small Business Administration has put together this brief, easy to understand matrix between the structures on ownership, liability, and taxation:
| Business structure | Ownership | Liability | Taxes |
| Sole proprietorship | One person | Unlimited personal liability | Self-employment tax Personal tax |
| Partnerships | Two or more people | Unlimited personal liability unless structured as a limited partnership | Self-employment tax (except for limited partners) Personal tax |
| Limited liability company (LLC) | One or more people | Owners are not personally liable | Self-employment tax Personal tax or corporate tax |
| Corporation – C corp | One or more people | Owners are not personally liable | Corporate tax |
| Corporation – S corp | 100 people or fewer certain trusts and estates no partnerships, corporations, or non-resident aliens | Owners are not personally liable | Personal tax |
| Corporation – benefit corporation | One or more people | Owners are not personally liable | Corporate tax |
| Corporation – Nonprofit | One or more people | Owners are not personally liable | Tax-exempt, but corporate profits can’t be distributed |
Source: U.S. Small Business Administration
Choosing the right business structure is a crucial decision that can significantly impact your company’s operations, taxes, and legal liabilities. It’s essential to carefully consider factors such as the level of liability protection you require, your tax situation, the nature of your business activities, and your long-term growth plans. At Burke CPAs & Advisors, we consult with each client to understand their unique situation and carefully evaluate and determine the best course of action. Ultimately, the right business structure will help pave the way for your enterprise’s success and sustainability in today’s competitive landscape.