How To Choose The Right Structure For Your Business

Are you confused about choosing a business structure for your business? Well, choosing an ideal business structure for your business is a complex task. But there are vital factors to consider, such as ownership type, taxation, liability, etc.

Therefore, in this Aniday's guide, we will highlight the vital aspects to evaluate when choosing the right business structure for your business.

What Are The Types Of Structures?

Depending on your business requirements and how it works, you can decide the right type of business structure for your business. Here are the key types of legal business structures: 

• Sole proprietorship
• Partnership
• Limited Liability Company
• Corporation
• Cooperative

How Do You Choose A Business Structure For Your Business?

Learn about each business structure below with insights from Aniday, and find the ideal one for you!

Sole Proprietorship

A sole proprietorship is a business structure where you handle your business activities. Therefore, in a sole proprietorship, the business and the operator are one person, and that's how the legal and tax authorities consider it.

According to the law, it is considered an income source for the proprietor. Therefore, the business financial details must be mentioned separately in the personal income tax form.

Best for: If you want to maintain a low-risk business while owning the business assets, liabilities, and income for yourself, a sole proprietorship business is your go-to option. Also, if you want to try and test your business before expanding it, consider this business structure.

Partnership

In a partnership business, there are two or more proprietors. A partnership business maintains a contractual agreement, including the revenue shares, responsibilities, percentages, etc. However, in a partnership business, there are two common types as follows:

• Limited partnerships (LP): In an LP business, one general partner will owe unlimited liability, and all other partners in the agreement will have limited liability. However, the partners with limited liability will also possess limited business control.
• Limited liability partnerships (LLP): In an LLP business, every partner has limited liability. Therefore, all the associated partners are protected from debts in the partnership, and the activities of one partner do not affect the other.

When making the tax forms in a partnership business, each partner should apply the exact percentages to their income and expenses in the tax form.

Best for: Partnership is best if multiple partners work in the same business. It is also an excellent choice to test your business idea with various partners before expanding.

Limited Liability Company (LLC) 

In an LLC business, the partners have limited liability over the company. Therefore, it helps protect your personal liabilities and assets even if the company leads to bankruptcy or lawsuits. Here's how the LLC business structure works:

• The partners don't face corporate tax on their incomes, profits, and share losses.
• Members of an LLC are generally considered self-employed while liable to pay self-employment tax contributions.
• It may have a limited timeframe of agreement because when a member enters or leaves an LLC, specific state laws indicate that the membership must be dissolved and reformed with new changes.

Best for: An LLC business structure is best if your business has a medium or high risk of affecting your personal assets.

Corporation

In a corporation's business structure, there are many variations. They are as follows:

• C corporations (C corp)
• S corporations (S corp)
• Benefit corporations (B Corp)
• Close corporations
• Non-profit corporations

C Corporation

Generally, a corporation is also called a C corporation. However, it is a type of corporation where the legal entity is considered separate from its owners. Here are the features of the C corp business structure:

• Owners are protected from personal liability, but the corporation will bear the legal responsibility.
• Profits may be taxed twice in certain instances, once at the corporate level, and when dividends are distributed separately.
• The corporation operates independently from shareholders even if there are changes in the ownership.
• It can attract investors and employees by selling stock effectively and raising capital.

Best for: A C Corp is ideal if you want to raise capital or have a medium—or higher-risk business.

S Corporation

An S corporation is also called an S corp. As discussed above, C Corp includes double taxation, but it is avoided in S Corp. Here are the key features of the S Corp business structure:

• Profits and some losses are handed directly to owners' personal income (avoids corporate tax rates).

• Tax rules for S corps vary by state.

• The S Corp business functions independently, even if there are shareholder changes.

• Registering as an S corps requires your business to meet specific IRS requirements.

Best for: An S corporation is the best choice to avoid corporate taxes like a C corporation while qualifying to file your business according to IRS requirements.

B Corporation

A benefit corporation (B Corp) is one of the for-profit corporations. Moreover, these corporations are also recognized by most U.S. states, ensuring transparency. Here are the key features of the B Corp business structure:

• Ability to operate as both a profit and a public benefit.

• Shareholders are held accountable to generate public benefits.

• Some states may have additional requirements to show business annual reports to identify the corporation's public benefit contributions.

• They are taxed similarly to C corps.

Best for: A B Corp is the best choice if you want to function unitedly towards a mission, profit, and public benefit.

Close Corporation

Close corporations are less likely than the traditional corporate structure but may differ based on state rules. Here are the key features of a close corporation business structure:

• Fewer requirements for meetings and record-keeping.

• Generally managed by a few shareholders directly.

• Shares aren't publicly traded.

• Close corporation regulations may differ by state.

• Ability to operate without a board of directors.

Best for: Close corporations are the best choice if you want to run the business among a small group of shareholders. They don't require a board of directors.

Non-Profit Corporation

Non-profit corporations solely function for the benefit of the public. Here are the key features of a non-profit corporation business structure:

• Focuses on charity, education, or similar work.

• Eligible for federal and state income tax exemption.

• Must file with the IRS for tax-exempt status.

• Profits are reinvested and not distributed to members.

• Known by this IRS tax-exempt code.

Best for: A non-profit corporation is the best choice if you want to function solely for public benefits without distributing income to members.

Cooperative

In a cooperative business structure, the business is owned and functions to fulfill the benefits of the individuals using its services. Here's how a cooperative business structure works:

• Owned and controlled by its members.

• One member has the power of only one vote, regardless of shares owned.

• An elected board of directors and officers manages it.

• Members join by purchasing shares.

• Members vote on the cooperative's direction.

Summary Of Business Structures

Business Structure	Ownership	Liability	Taxes	Key Feature
Sole Proprietorship	One person	Unlimited personal liability	Self-employment, Personal tax	Simple setup, full control
Partnership	Two or more people	Unlimited, unless limited	Self-employment (not limited to partners), Personal tax	Shared management
LLC	One or more people	Limited liability	Self-employment, Personal or Corporate tax	Flexible tax options
Corporation - C Corp	One or more people	Limited liability	Corporate tax	Suitable for larger businesses
Corporation - S Corp	Up to 100 individuals, specific trusts	Limited liability	Personal tax	Pass-through taxation
Corporation - B Corp	One or more people	Limited liability	Corporate tax	Social and environmental purpose
Corporation - Nonprofit	One or more people	Limited liability	Tax-exempt, no profit distribution	Mission-driven, public benefit focus

Final Thoughts

In conclusion, to choose a business structure, you need to compare and contrast the key traits of each structure. Your chosen structure may vary depending on your business, goals, and requirements. Therefore, carefully consider each type of structure to find the best one for you.

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We hope this guide helped you find the proper business structure.