What Business Structure Should I Choose? The 5 Most Common Types
September 5, 2023
When you start a business, choosing the right legal setup is paramount. Your choice will have a major impact on how you are taxed and what kind of liabilities you must be aware of and manage. The five most common business structures are:
- Sole Proprietorship
- Limited Liability Company
- S Corporation
At New Valley Bank, we are dedicated to helping driven entrepreneurs get their businesses off the ground and growing year after year. That’s why we’ve created this handy guide breaking down the most common business structures so that you can make the right choice for your business.
1. Sole Proprietorship: Flying Solo with Simplicity
A sole proprietorship is a business structure owned and managed by one person. It is the simplest and most common business entity that involves minimal legal formalities. Starting a sole proprietorship is easy and requires minimal paperwork. The owner has complete control over the business and enjoys all profits. However, losses are also borne by the proprietor and are considered personal expenses for tax purposes. Additionally, personal liability risk is high, as the owner is personally responsible for all debts and obligations of the business.
2. Partnership: Teamwork for Success
The second business structure we’ll cover is partnerships. Partnerships are a popular business structure that allows two or more individuals to work together towards a common goal. There are two types of partnerships: general and limited. General partnerships feature shared responsibilities and liabilities, while limited partnerships involve limited liability for some partners. Partnerships pool resources and share profits, but require clear agreements to avoid disputes down the line. Collaboration is key to successful partnerships, as partners must work together towards a shared vision.
3. Limited Liability Company (LLC)
Thirdly, we come to the LLC, or limited liability company. This is a type of business structure that combines the benefits of a partnership and a corporation. It offers liability protection to its members, meaning they are not personally responsible for the company’s debts or legal issues. LLCs also provide flexibility in management and taxation, allowing members to choose how they want to be taxed. This structure is appealing to entrepreneurs who want personal liability protection while still maintaining management control. Forming an LLC is often considered advantageous for small businesses, real estate investments, and professional service providers.
Starting an LLC and considering getting an SBA loan to help you get started? Here’s what you should think about first.
4. Corporation: The Entity with Legal Shield
A corporation is a legal entity that has been granted the authority to act as a single entity, separate from its owners. It is formed to conduct business, generate profits, and provide goods or services to customers. Corporations have limited liability, meaning that the owner’s personal assets are protected from any business debts or legal issues.
5. S Corporation: Tax Efficiency and More
An S corporation is a type of corporation that allows for pass-through taxation, meaning that profits and losses are passed through to shareholders and reported on their personal tax returns. To qualify, a corporation must have no more than 100 shareholders who are US citizens or residents, and only issue one class of stock. S corporations provide the liability protection of a corporation while also offering tax advantages like deductions for healthcare expenses. Examples of businesses that benefit from S corporations include small businesses like restaurants, retail stores, and consulting firms.
Charting Your Own Business Path
Ultimately, choosing the right business structure is crucial for achieving your business goals and aspirations. Consider the number of owners and their roles, tax implications, and liability concerns when making your decision. Additionally, long-term growth strategies should be taken into account to ensure the sustainability of your business.
At New Valley Bank, we believe in your ambition and are here to support your growth. Ready to chart your own path? Contact us today!