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Understanding Business Structures

By: Start Your Brand

November 29, 2014

Understanding the difference between each business structure is very important when you are starting a new business. Each business structure is different, so you must do your research in order to select the proper structure that fits your company best. Below is a brief overview of the most common business structures used today:

Sole Proprietorships: An unincorporated business run by only one person. If the owner would like to conduct business under any name other than their own personal name, they must register a DBA with their state government. Sole proprietorships entitle the owner to all profits of the business, but also hold the owner responsible for all debts, losses and liabilities. Sole proprietorships have no distinction between business assets and personal assets. Unless you establish these as completely separate entities, your personal assets are at stake in the event of a lawsuit against your company.

Partnerships: A business owned and controlled by two or more persons. All partners are expected to contribute to all aspects of the business including labor, property & money, and share in all profits and losses of the business. If the name of your business is anything other than your own or the name of your partner(s), you must register a DBA with your state government. There are three different types of partnerships:

  • General Partnerships: ALL aspects of the business are divided equally among all partners. These aspects include profits, losses, debts, management duties, and all liabilities.
  • Limited Partnerships: A partnership that offers limited liability as well as limited involvement with management decisions. These limits depend on each member's investment percentage, which is devised during the filing process.
  • Joint Ventures: A 'General Partnership' that is only involved with one project, which is usually for a limited period of time. If the corresponding partners choose to carry on business and remain a partnership, they must file to do so.

Corporations (C Corp): A legal business entity owned by shareholders who exchange money or property for the corporation's capital stock. The corporation is held liable for all aspects of the business, but the shareholders are not. Corporations are often meant for larger types of businesses with multiple employees due to the costly administrative fees and complex tax and legal requirements. Corporations offer the ability to sell ownership shares in the business through stock offerings, and are usually 'double taxed' throughout the year.

S Corporations (S Corp): A specific type of corporation that can avoid double taxation if eligible. This type of corporation is created through the IRS tax election, and can only be obtained if your business qualifies under the IRS stipulations.

Limited Liability Company (LLC): A diverse legal structure that combines the tax flexibility of a partnership with the limited liability features of a corporation. Owners of an LLC are referred to as members, and some states offer the ability to form a single-member LLC. The 'Limited Liability' basically splits your personal assets from your business assets. This protects all of your personal property in the event of a lawsuit against your company.