Choosing Your Business Structure: Types and Use Cases

Key takeaways

Business structures define ownership, liability, and tax treatment, helping you choose the model that aligns with your goals and risk tolerance.

• Sole proprietors are treated as the same legal entity as their business, so all income is subject to self‑employment tax.

• Limited partnerships and LLPs offer different levels of liability protection, allowing owners to share control while managing personal risk.

• You can complete your business setup by following the steps required by your state to become an official legal entity.

Learn about the most common business structures, their benefits, and their most common use cases. Then, consider enrolling in the AI For Business Specialization from the University of Pennsylvania. In as few as four weeks, you can develop a deployment strategy for incorporating artificial intelligence (AI), machine learning (ML), and big data into your organization. 

Types of business structures

Picking a business structure is a fundamental part of growing or starting a business. The legal structure under which your business operates impacts everything from how you are taxed to your legal liability for its debts. 

Different business undertakings require different structures. This section highlights the most common types of business structures and describes their different purposes.

1. Sole proprietorship

A sole proprietorship is a business structure in which a single individual owns an unincorporated business by themselves. In the United States, anyone who engages in business activities by themselves, such as freelancing or subcontracting, is automatically considered a sole proprietor without any need for further registration.

Sole proprietors who hire employees, however, must go through the proper channels to have them legally recognized.

Unlike in some other business structures, which shield owners from financial and legal liability for the business, sole proprietors are considered the same as their business and are liable for all its debts and other legal obligations. Because sole proprietors are considered the same legal entity as their business, they must pay self-employment tax on all income earned through the business.

The liability incurred by sole proprietorships means that they are likely best suited for small, low-risk businesses owned by only one person. They can also be good structures for new businesses in the early stages of their operation.

Common examples of sole proprietorships include:

• Small, local grocery stores 

• Freelance writers

• Artists 

What is the best organizational structure for a small business?

The best organizational structure for a small business is the one that gives you the amount of control you want while protecting your liability. Small businesses frequently choose a functional organizational structure. This structure breaks the business down into departments or functional areas, meaning each person is working within their specialization. Also, it is a hierarchy, or a top-down pyramid structure. For example, within the functional organizational structure, you would separate your business into departments such as marketing, sales, and operations.

Read more: 16 Small Business Ideas and How to Find Yours

2. Partnership 

A partnership is a business structure in which two or more individuals own a business together. There are two kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).

In a limited partnership (LPs), one person incurs unlimited liability for the business, while the other partners only possess limited liability. As a result, the partner with the most liability typically also maintains majority control of the business, a dynamic that is formalized through a partnership agreement. All partners in an LP pay self-employment taxes on their salary but not their share of the business’s income, regardless of liability status.

In limited liability partnerships (LLPs), all members of the partnership maintain only limited liability for the business. This means that each of the partners is also protected from one another, ensuring that the debts one partner has incurred are not transferred to the others. As in an LP, partners in an LLP pay self-employment taxes on their salary but not their share of the business’s income.

Due to the liability shielding they provide, partnerships are likely best suited for small businesses with low to moderate risk, with more than one owner.

Common examples of partnerships include:

• Law firms

• Restaurant groups

• Investment firms

3. Co-operative

A co-operative, or co-op, is a democratically controlled business owned equally by its members. A co-op can be run only for the benefit of members or sell its goods or services to non-members.

The structure of a cooperative is unique but also relatively straightforward. In a typical co-op structure, the members elect a board of directors, who then hire managers who hire workers who create products or services for customers. A co-op that is run and managed by its own workers is called a worker co-op. Members of a co-op have only limited liability for the business.

Individuals form co-ops for a range of reasons, including to pool together resources, improve their economic and social positions, and enact shared values.

Despite being less well-known than other business structures, there are actually many successful co-ops in the United States. Some of the most well-known examples include:

• Sunkist 

• REI

• Land O’ Lakes

4. Corporation

A corporation is a collection of individuals that act as a single entity [1]. In the United States, there are many different types of corporations. Each of them is outlined below. 

1. Limited liability corporation (LLC)

A limited liability company (LLC) is a type of incorporated business structure in which its members share ownership of a business. An LLC can be owned by a single individual, many people, or a mix of other organizations, including corporations, foreign entities, or even other LLCs. When a member leaves an LLC, a new one must replace them.

One of the benefits of an LLC is that it provides limited liability for the owners from the business. This means that the LLC is treated as a separate entity from its members, which separates and shields their personal assets from the company’s own debts and legal obligations. Members of an LLC must pay self-employment taxes on their share of the business’s profits.

Due to the liability protection they provide, LLCs are likely good for established businesses with moderate to high risk and operated by owners who want to shield their own personal assets. 

Some well-known LLCs include:

• Dunkin

• WhatsApp

• Anheuser-Busch

2. C corporation

A C corp (sometimes just called a “corporation”) is a business structure in which the members and the business are considered completely separate legal entities.

C corps offer owners much stronger liability protection from a business than either an LLC or a public limited company (PLC). While a C corp provides protection, it can also be costly to form and requires significant bookkeeping and reporting to operate.

As a separate legal entity, a C corp’s profits are taxed before being distributed to members. Those members must then pay taxes on their own personal income gained through the C corp, which can occasionally lead to double taxation.

C corps are likely best suited to well-established businesses with owners who are looking to create the strongest amount of liability protection between their personal assets and the business.

Some well-known examples of C corps include:

• Apple

• Microsoft

• Starbucks

3. S corporation 

An S corporation (S corp) is an incorporated business structure, much like a C corp, in which the members and the business are considered separate entities. However, unlike a C corp, an S corp allows members to be paid their share of profits (and some losses) directly, ensuring that they are not taxed twice.

S corps offer similar advantages to a C corp, such as liability protection that creates legal separation between the members’ assets and the business. At the same time, they can also be costly to set up and require significant bookkeeping and reporting to operate. Different states might tax S corps differently.

Due to the liability protection it provides and the taxation benefits, an S corp is likely a good idea for businesses with moderate to high risk. 

4. B corporation

A benefit corporation, or “B corporation,” is a for-profit business that has been certified by the non-profit B Lab as a business focused on the well-being of stakeholders, such as customers and the environment, as well as the financial goals of shareholders. Certified B corps must make a legal commitment to have a structure that reflects the interests of all stakeholders, exhibits transparency in their operations, and demonstrates a high social and environmental performance. All other business structures, such as sole proprietorships, limited liability corporations, and C corporations, can become certified B corporations through B Lab. Businesses seek B corporation certification in order to hold themselves accountable for goals beyond simply profit-seeking motives and to convey their commitment to both customers and others in the industry.

For-profit businesses that wish to commit themselves to improving their societal impact and convey that commitment to others might consider obtaining B corp status. Today, more and more businesses are becoming B corporations. Some well-known examples of B corps include:

• Coursera

• Ben & Jerry’s 

• Patagonia

5. Nonprofit

A nonprofit corporation is an organization that seeks to do something other than generate profit for its members. Nonprofits can do a wide range of activities, such as provide charity to the public, conduct scientific research, offer free educational services, and advocate for legal reforms. |

Nonprofits are tax-exempt due to the public-oriented nature of their work. However, this also means that the profits a nonprofit produces are subject to special rules about how the nonprofit can spend them. Although the structure and liability protections of a nonprofit are similar to those of C corps, the members of a nonprofit are not allowed to take profits generated from the organization.

Nonprofits are likely best suited to organizations that are looking to do work that benefits the public and advocate for a cause without intending to generate profit for the owners. Some well-known examples of nonprofits include:

• Human Rights Watch 

• American Red Cross

• Salvation Army

Different types of business structures: Make it official

Once you have settled on a suitable business structure, you need to formalize it [2]. While the requirements for each business will vary from structure to structure and state to state, the general list of next-step considerations for business owners remains the same. You should:

1. Register your business with your state.

2. Get a tax ID number (in some cases).

3. File for licenses and permits (when needed).

Once you have completed these steps, you are now ready to operate as a legal business entity. Congratulations!

Uncover key resources for growth

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