Starting a business is an exciting and challenging time for both new and seasoned entrepreneurs. Often, one of the biggest challenges is making the jump from the idea or concept of the business, to the many actionable items needed to get the business up and running. One of the first hurdles of any new business is determining what the ideal business structure of the new venture will be. Information about various business entity structures abounds, but it can often be difficult to parse through the volume of information and determine what the most important considerations are.

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The goal of this article is to provide a high-level summary of some of the important characteristics of various common for-profit business entity structures and the considerations that entrepreneurs should keep in mind as they explore their options. You can read more about non-profit business enterprises here. It is important to note that each type of entity has a number of nuances which are beyond the scope of this article and these nuances can significantly impact business operations in particular circumstances. As an entrepreneur, if you find yourself in a unique or uncertain situation, it is always a good idea to consult an attorney whose practice focuses on business or corporate law.

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Sole Proprietorship:

Overview:

A sole proprietorship is a business structure owned and operated by a single individual. It is characterized by its simplicity and ease of establishment. The owner has full control over the business decisions, and profits and losses are reported on their personal tax return. However, the main drawbacks include limited access to resources, unlimited personal liability for business debts, and potential growth limitations. Operators of sole proprietorships often choose to file for a Doing Business As (DBA) or “trade name”. An example would be a business owned and operated by John Smith that operates as Smith’s Supply Store.

Benefits:

• Simplicity: Easy to set up and maintain.
• Low Cost: The straightforward structure leads to inexpensive administration.
• Full Control: The owner has complete control over business decisions.
• Tax Advantages: Profits and losses are reported on the owner's personal tax return.

Drawbacks:

• Limited Resources: Limited access to capital and resources.
• Unlimited Liability: The owner is personally responsible for business debts and liabilities.
• Limited Growth: Potential for limited growth due to limited resources.

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Joint Venture:

Overview:

A joint venture is a collaboration between two or more entities for a specific project or period. Partners share resources, risks, and costs. While it allows for specialized skills and expertise, conflicts of interest and the complexity of managing joint ventures are potential drawbacks. Joint ventures are typically formed with a specific goal in mind and may have a limited duration. Joint ventures can be organized as either a distinct legal entity, or a purely contractual relationship between two or more parties.

Benefits:

• Resource Sharing: Partners share resources, skills, and expertise.
• Risk Sharing: Risks and costs are shared among the partners.
• Specialization: Partners can bring specialized knowledge to the venture.

Drawbacks:

• Conflict of Interest: Potential for conflicts between partners with different goals.
• Complexity: Joint ventures can be complex to manage and coordinate.
• Limited Duration: Typically formed for a specific project or period.

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General Partnership:

Overview:

A general partnership involves two or more individuals managing and operating a business together. It is relatively easy to establish, and profits and losses pass through to the partners' personal tax returns. However, general partners have unlimited personal liability for business debts, and conflicts among partners are possible. Access to capital may be limited compared to other structures.

Benefits:

• Ease of Formation: Relatively easy and inexpensive to establish.
• Shared Decision-Making: Partners share in decision-making and management.
• Tax Advantages: Profits and losses pass through to the partners' personal tax returns.

Drawbacks:

• Unlimited Liability: Partners are personally liable for business debts and liabilities.
• Conflict Potential: Disputes among partners can arise.
• Limited Capital: Limited access to capital compared to corporations.

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Limited Partnership:

Overview:

In a limited partnership, there are both general partners who manage the business and limited partners who provide capital but have limited liability. This structure offers a balance between management control and liability protection. However, it is more complex to establish and maintain, and limited partners have limited control over business decisions.

Benefits:

• Limited Liability: Limited partners have limited liability for the business debts. Limited partners can only lose up to what they put in.
• Specialization: General partners manage the business, while limited partners provide capital.
• Tax Advantages: Limited partners report profits and losses on their personal tax returns.

Drawbacks:

• Complexity: More complex to set up and maintain than a general partnership.
• Limited Control: Limited partners have limited control over business decisions.
• Limited Life: Dissolution may occur if a general partner leaves or dies.

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Limited Liability Company (LLC):

Overview:

An LLC combines the limited liability of a corporation with the flexibility of a partnership. Members enjoy limited personal liability, and the structure offers flexibility in management and profit distribution. However, there are higher setup and maintenance costs compared to simpler structures, and dissolution may occur if members leave or under specific circumstances.

Benefits:

• Limited Liability: Members have limited liability for business debts.
• Flexibility: Flexible management structure and profit distribution.
• Tax Flexibility: Can choose to be taxed as a disregarded entity, partnership, S-Corp, or C-Corp depending on the number of members.

Drawbacks:

• Cost: May have higher setup and maintenance costs compared to sole proprietorships, joint ventures, or partnerships.
• Complexity: More paperwork and regulations than sole proprietorships.
• Limited Life: Dissolution may occur if members leave or if specified events happen.

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Corporation (Taxed as C-Corp):

Overview

A C-Corporation is a distinct legal entity with shareholders, providing limited liability to its owners. It has easier access to capital through the sale of stocks and enjoys perpetual existence. However, double taxation, where profits are taxed at both the corporate and individual levels, is a significant drawback. C-Corps are subject to complex regulations and reporting requirements.

Benefits:

• Limited Liability: Shareholders have limited liability.
• Access to Capital: Easier access to capital through the sale of stocks.
• Perpetual Existence: Continuity of existence regardless of changes in ownership.

Drawbacks:

• Double Taxation: Profits are taxed at the corporate level and again when distributed as dividends.
• Complexity: More complex to set up and maintain than other structures.
• Regulation: Subject to more government regulations and reporting requirements.

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Corporation (Taxed as S-Corp):

Overview:

An S-Corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders. It combines limited liability with pass-through taxation. However, it has eligibility criteria and restrictions on the number and type of shareholders, as well as operational constraints compared to a C-Corp.

Benefits:

• Limited Liability: Shareholders have limited liability.
• Pass-Through Taxation: Profits and losses pass through to the shareholders' personal tax returns.
• Perpetual Existence: Continuity of existence regardless of changes in ownership.

Drawbacks:

• Eligibility Criteria: Restrictions on the number and type of shareholders.
• Limited Capital Structure: Restrictions on the types of stock and the number of classes.
• Operational Constraints: Stricter operational and organizational requirements compared to a C-Corp.

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Other Less Common Structures:

• Benefit Corporations (B-Corps)
• Professional Corporation (PC)
• Cooperatives (Co-Ops)

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