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Before turning your business idea into a thriving business, you might\u00a0determine the right business structure<\/strong> for your company.<\/p>\n This isn’t just a formality. Your chosen structure is a strategic cornerstone affecting everything from your personal liability to potential investment opportunities.<\/p>\n After nearly three decades as a lawyer, entrepreneur, and mentor, I’ve seen firsthand the ups and downs of setting up a corporation, the steps to create an LLC, the nuances of starting partnerships, and the structures we discuss in this guide. This guide draws from my direct experience. It offers practical advice, actionable tips, and best practices gathered from mentoring hundreds of entrepreneurs and helping thousands to establish and grow their businesses.<\/p>\n 1. Limited Liability Company (LLC)<\/strong><\/a> <\/div> Choosing how to structure your business hinges on several key factors.<\/p>\n The four most popular business structures are sole proprietorships, partnerships, limited liability companies, and corporations. So, if you have a great business idea<\/a> and are ready to start your business, read on to learn about eleven different types of business structures and how to decide the right one.<\/span><\/p>\n The Limited Liability Company (LLC)<\/a> is the favorite of many, protecting personal assets from business debts. Whether flying solo or having partners, an LLC is flexible and relatively easy to set up.<\/p>\n An LLC (Limited Liability Company) is known as a ‘pass-through’ entity because the profits of an LLC flow directly to the managers\/members.<\/p>\n This business structure is quickly becoming the most common form of incorporation. LLCs have a relatively flexible structure that provides many benefits of a partnership<\/a> or sole proprietorship, with some of the protections provided by C corps and S corps (more on those business structures below). They do not require many formal processes required by other types of corporations.<\/p>\n However, LLCs cannot offer stock to the public, have some ongoing annual filing requirements, and are still required to keep internal paperwork.<\/p>\n Importantly, people who ignore the requirements of operating an LLC can lose their personal liability protection in a process called \/piercing the corporate veil’. If this happens, business owners can retroactively be held liable to pay corporate debts with personal funds.<\/p>\n I’ve personally used this type of structure across many new startups (except for companies that I knew would require outside funding\u2014for those, I used a C Corp structure). LLCs are simple to create, have minimal state requirements, and offer flexibility.<\/p>\n <\/i> Hire an expert to form your LLC and save time.<\/span> Our trusted partners can help: Northwest ($39 + state fee)<\/b><\/a> or Bizee ($199 + state fee)<\/b><\/a>. Many people don\u2019t know that LLCs can also make S Corp elections (more detailed info about S Corps is below).<\/p>\n An S Corp election for an LLC can also provide additional tax benefits to an LLC.<\/p>\n By making an S corp election, the LLC distributions (the passing of profits after payment of LLC expenses, including payroll) are not treated or taxed as wage income to the owners.<\/p>\n Let\u2019s say, for example, that you own an LLC with annual profits of $1M. Without an S corp election, all profits pass through to the owners’ personal income, and the LLC owner would have to pay payroll taxes on the $1M worth of profits.<\/p>\n When an LLC elects to be taxed as an S Corporation, the owner’s reasonable salary is subject to payroll taxes<\/a> (which cover Social Security and Medicare). Still, the distributions (profits taken out of the business in addition to the salary) are not. The key term here is “reasonable salary.” The IRS expects the salary to align with what others in similar roles would earn for similar work. Underpaying oneself to avoid taxes can attract IRS scrutiny.<\/p>\n The potential tax saving comes from the distributions not being subject to self-employment tax<\/a> (which today is 15.3% for Social Security and Medicare). This can represent a significant saving, especially at higher income levels. But you should also remember that this is subject to how the Social Security portion of self-employment taxes is capped. For 2023, for example, only the first $160,200 of income is subject to the 12.4% Social Security tax (this base is $168,000 for 2024); income above this level is subject to only the 2.9% Medicare tax. This means the potential for tax savings with an S Corp election decreases once your income is above the Social Security wage base because the higher portion of the self-employment tax (Social Security tax) no longer applies.<\/p>\n Also, remember that maintaining S Corp status involves additional costs and administrative requirements, such as payroll processing and potential state-level taxes and fees. So, ensure you compare fully to understand if this makes sense.<\/p>\n As tax laws can be complex and subject to change, it’s always advisable to consult with a tax professional or CPA to understand the specific implications for your situation and ensure compliance with IRS guidelines.<\/p>\n The restrictions described above applicable to corporations also apply to LLCs that make an S corp election. Also, if the owners aren\u2019t paid reasonable salaries, the IRS can invalidate the S corp election, requiring the payment of back taxes and penalties.<\/p>\n Most investors strongly prefer C Corps to LLCs or LLCs that make an S Corp election. So, if you’re creating a company and know you will need outside investors, consider the challenges of raising funding with a business structure that your investors will not prefer.<\/p>\n Receive six actionable guides, including a how to start a business checklist, detailed comparisons of LLCs, corporations, sole proprietorships, and partnerships to determine the best fit for your business, plus insights on crafting a compelling pitch deck to attract investors.<\/p> Receive six actionable guides, including a how to start a business checklist, detailed comparisons of LLCs, corporations, sole proprietorships, and partnerships to determine the best fit for your business, plus insights on crafting a compelling pitch deck to attract investors.<\/p> Receive six actionable guides, including a how to start a business checklist, detailed comparisons of LLCs, corporations, sole proprietorships, and partnerships to determine the best fit for your business, plus insights on crafting a compelling pitch deck to attract investors.<\/p> General partnerships allow for two or more business owners, also considered ‘partners.’<\/p>\n A general partnership, like a sole proprietorship, is the default ‘legal entity’ if two or more people join together to conduct business without registering with the state. Under this structure, a company cannot issue any stock, and partners are held personally liable for any taxes or debts.<\/p>\n There is no legal separation between individual assets and business assets. Additionally, like a sole proprietorship, a partnership dies when one or more partners exit. However, provisions can be made as long as two or more partners remain in the business.<\/p>\n Pros of general partnership:<\/strong><\/p>\n Cons of general partnership:<\/strong><\/p>\n Limited Partnerships (LPs) share similarities with General Partnerships, such as being owned by two or more individuals and benefiting from pass-through taxation, meaning the business itself isn’t taxed; instead, profits and losses pass through to the partners’ personal tax returns.<\/p>\n The pivotal distinction lies in the role of limited partners. Unlike in GPs, where all partners share equal liability, limited partners in an LP enjoy protection from the business’s debts beyond their investment amount.<\/p>\n Consider the case of a boutique design firm, where one partner handles creative direction while the other manages finances. If structured as an LP, the financial partner could be a limited partner, minimizing liability in case of legal issues related to design decisions.<\/p>\n A potential drawback is that limited partners often relinquish control over daily operations. For someone invested in the company’s direction, this lack of influence can be a source of frustration.<\/p>\n Every LP must have at least one general partner who bears unlimited liability. This means they’re fully responsible for the business’s debts and obligations. For instance, in a restaurant LP, the general partner might run the day-to-day operations, fully accountable for any operational liabilities.<\/p>\n LPs balance protection and control, making them a compelling choice for many entrepreneurs. But if you won’t be comfortable with limited control, consider whether this business structure is right for you. I’ve counseled many people frustrated with an LP because of this limitation.<\/p>\n Receive six actionable guides, including a how to start a business checklist, detailed comparisons of LLCs, corporations, sole proprietorships, and partnerships to determine the best fit for your business, plus insights on crafting a compelling pitch deck to attract investors.<\/p> Receive six actionable guides, including a how to start a business checklist, detailed comparisons of LLCs, corporations, sole proprietorships, and partnerships to determine the best fit for your business, plus insights on crafting a compelling pitch deck to attract investors.<\/p>Business Structures: The Ultimate Guide<\/h2>
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\n2. General Partnership (GP)<\/strong><\/a>
\n3. Limited Partnership (LP)<\/strong><\/a>
\n4. Limited Liability Partnership (LLP)<\/strong><\/a>
\n5. Sole Proprietorship<\/strong><\/a>
\n6. C Corporation (C Corp)<\/strong><\/a>
\n7. S Corporation (S Corp)<\/strong><\/a>
\n8. Nonprofit<\/strong><\/a>
\n9. Co-operative<\/strong><\/a>
\n10. B Corporation<\/strong><\/a>
\n11. Joint Venture<\/strong><\/a>
\nOther vital considerations related to your business structure<\/strong><\/a>
\nFrequently Asked Questions (FAQs)<\/strong><\/a><\/p>\n![](\"https:\/\/images.crowdspring.com\/blog\/wp-content\/uploads\/2020\/03\/27125439\/cs-200px.png\")
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1. Limited Liability Company (LLC)<\/h2>\n
Pros of an LLC:<\/h3>\n
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Cons of an LLC:<\/h3>\n
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S Corp elections for LLCs<\/h3>\n
Pros for S corp election for LLC:<\/strong><\/h3>\n
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Cons for S corp election for LLC:<\/strong><\/h3>\n
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Free Business Startup Kit<\/h2>
Get your free startup kit<\/i><\/a><\/div><\/div><\/div>Free Business Startup Kit<\/h2>
Get your free startup kit<\/i><\/a><\/div><\/div><\/div>Free Business Startup Kit<\/h2>
Get your free startup kit<\/i><\/a><\/div><\/div><\/div><\/p>\n2. General Partnership (GP)<\/h2>\n
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3. Limited Partnership (LP)<\/h2>\n
Pros of limited partnership:<\/strong><\/h3>\n
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Cons of limited partnership:<\/strong><\/h3>\n
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Free Business Startup Kit<\/h2>
Get your free startup kit<\/i><\/a><\/div><\/div><\/div>Free Business Startup Kit<\/h2>