Your 7-Minute Guide to Understanding Business Structures. Choose the Right One Right Away.

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Your 7-Minute Guide to Understanding Business Structures. Choose the Right One Right Away.

Understanding Business Structures

Business structures are not as complicated as they may seem. When setting out to form your company, you'll want to research each type of business structure. Understanding how each major structure benefits you, as well as burdens you, will ease the anxiety associated with choosing which one is best suited to your needs.

What Are the 4 Types of Business Structures?

1. Limited Liability Company

Commonly referred to by its abbreviated name of LLC, this business structure is known for its simplicity and has grown in popularity during the last 20 years. An LLC can be owned by one person — called a single-member LLC — or have multiple members that share ownership in the business.

As the name of this entity structure also discloses, it helps provide business owners with protections when it comes to personal assets. LLCs also offer flexibility and do not require a board of directors and the filings that corporations are responsible for. This means less paperwork and more time and money to devote to building your business.

Incfile | Business Plan Worksheet

2. C Corporation

A corporation is an entity that is separate from its owner or owners and run by a board of directors and shareholders. This means that a corporation does not rely on one person and does not dissolve when an owner or board member dies or leaves the company. This differs from an LLC, which can be owned by a single member or multiple members and can dissolve if an owner dies.

Another key difference is that a corporation incurs double taxation. Unlike LLCs that can pass through the profits of the business to the owners, who then report them on their personal taxes, C Corps must pay taxes on their profits. They then distribute the remaining profits to shareholders, who must also pay taxes on these earnings.

This type of business entity structure is better suited for larger businesses. It is also a good business structure if you plan to grow your business, become public and offer stock in your business or you want to attract investors and venture capitalists.

3. S Corporation

S Corps can boast the flexibility of an LLC while allowing transferability of ownership that LLCs cannot enact as a rule. They are less complex than C Corporations because they offer pass-through taxation where taxes are reported on personal income statements. This takes away the double taxation that a company incorporated as a C Corporation incurs.

Incfile has an S Corporation tax calculator that will help you see the tax savings over both entities. This will help you decide if incorporating as an S Corporation is the right answer for your new venture.

4. Nonprofit

A nonprofit is a business that has been created for a purpose other than making a profit. Revenue earned by a nonprofit goes toward a specific goal or cause. In addition, money earned by a nonprofit also goes into the business to pay employees, cover overhead costs and even expand.

There are more than 1.7 million nonprofits in the United States. Common nonprofit businesses include: hospitals, churches, schools, museums, food banks and homeless shelters.

How Do I Choose a Business Structure?

If you're not sure which business structure is right for you, another way of learning more about business types is by looking at the pros and cons of each entity. The four main types of business structures each have their advantage and disadvantages.

types of business formations

Why Is It Important to Choose the Right Business Structure?

The business structure you choose will affect your level of protection, tax filing and more. Choosing the right business structure will ensure you are able to run your business the way you want and expand and grow in the future. Consider your needs in these areas when selecting a business entity:

  • Protection. Each structure, as described in this article, provides a different level of liability protection. Corporations provide the most protection.
  • Raising money. Your chosen business entity will dictate how you can raise money. For example, an LLC cannot sell stocks.
  • Paperwork. Business entities have different paperwork requirements to form the business and keep it in compliance. A corporation will require more upkeep and effort than an LLC, which can lead to more fees.
  • Managing taxes. As a legal business entity, you can take advantage of the many write-offs and exemptions available and also acquire health benefits programs. Depending on the structure you choose, your tax reporting requirements will vary from easy (LLC) to more complicated (C Corp).
  • Hiring employees. An incorporated business can hire people as employees rather than contractors, developing greater loyalty and longevity in their business practices. Consider the rules of the business structure you're interested in. For example, S Corps can only be owned by U.S. citizens and residents.
  • Transfer of ownership. Transferring ownership between members or stockholders will vary according to the structure you choose.

Legal Business Entities Are Structured to Protect

When you form a business, it becomes its own entity and has a life of its own. The level of protection differs by structure type, but if you start a legal business entity, you can feel safe in your personal finances. This is different from a sole proprietorship or general partnership, where the owner is the business.

Choosing the right entity for your business will be the first choice of many that will need to be made going forward. Raising capital, finding the right bank, creating a marketing plan, and setting financial milestones are just some of the next steps that lie ahead. Creating a plan and following it will also help guide your success. Download our free business plan template to help create your business roadmap and chart your business growth.

Incfile | Business Plan Worksheet

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