Without structure, big and small businesses would struggle to reach that well-oiled machine status every company strives to obtain. As no business is exactly the same, there are different types of business ownership, all with different traits that make them suited for some companies and wrong for others.
Small business owners have a lot on their plate when running and operating a company, which is why so many turn to business plan software for assistance. Choosing a business ownership style, also known as a business structure, is a necessary step when starting a small business or when reworking your current business plan.
Let’s examine the common types of business ownership, along with some pros and cons, to help you determine which one best fits your ideal structure.
A sole proprietorship occurs when someone does business activities but doesn’t register as another kind of business. There is no separate business entity, meaning there is no distinction between the business owner’s personal and professional assets and liabilities.
Sole proprietorships are simple and easy to start and are one of the most common types of business ownership. They are a good option for someone starting a low-risk business on a trial basis. Also, there is no additional taxation! However, because there is no formal separation, the business owner will become personally liable for any obligation the business might have.
| Pros | Cons |
| Easiest to form | Unlimited liability. Owner's personal assets are at risk for business debts |
| Business owner has complete control | Difficulty raising capital |
| Profits taxed as personal income (can be a tax advantage) | Limited growth potential |
Similar to sole proprietorships, partnerships are the simplest type of business ownership when two or more people are involved. There are two kinds: limited partnerships and limited liability partnerships.
A limited partnership has one partner with unlimited liability, while everyone else involved has limited liability. Limited liability comes with limited control. Since being a partner with limited liability is less of a risk, they get less say in decision-making processes.
A limited liability partnership has only one class of owners, meaning no partner has the risk and power of unlimited liability. A limited liability partnership shares the liability among the owners, protecting them from their partners' mistakes. Neither of these partnership types pays additional taxes.
| Pros | Cons |
| Easier to form than an LLC or corporation | Unlimited liability for all partners |
| Shared decision-making and workload | Potential for disagreements and conflicts between partners |
| Profits and losses shared among partners | Difficulty attracting and retaining employees compared to LLCs or corporations |
Not to be confused with a limited liability partnership, a limited liability company (LLC) separates the owner’s personal and professional assets. This means that if your business gets sued or goes bankrupt, your house, car, and personal piggy bank are safe.
Similar to sole proprietorships and partnerships, LLCs do not pay additional federal income taxes or those associated with being a corporation. However, depending on their location, they might be subject to other state taxes. Also, LLCs fall under the category of self-employment, so those taxes fall on them as well.
An LLC is a good choice for a business owner willing to take a slightly bigger risk or protect their personal assets.
| Pros | Cons |
| Protects owners' personal assets | More complex than sole proprietorships or partnerships in terms of formation and maintenance |
| Relatively easy and inexpensive than corporations | May have limitations on raising capital compared to corporations |
| Flexible tax structure |
There are actually a few separate types of corporations, and each one has something that makes it a little different.
A C corporation, or just a regular corporation, is an entity kept separate from its owners. This means it offers the most protection in terms of personal liability.
Corporations have an advantage when it comes to funding: stock. A stock is a partial share in a company, so when people buy stock, they are essentially buying ownership and decision-making responsibilities.
However, starting a corporation costs more than any other business structure. Not only are they legally required to keep more records and release more reports, but they also pay income tax. In some cases, there is even double taxation—once on profits and then again on the dividends distributed to stockholders.
With so many different stakeholders contributing to the same business, corporations become solid. If someone leaves, the business remains relatively unaffected.
A corporation is a good structure for a business owner looking for a little more risk, good funding options, and the prospect of eventually “going public,” which means the company will eventually sell stock to the public.
An S corporation, or S corp, is a type of corporation that is meant to avoid the double taxation that hits normal C corporations.
To become an S corp and avoid that taxation, you file a special election. Once the business is officially an S corp, it is no longer taxed on profits. Instead, all profits and losses are passed on to the stockholders.
However, this is not possible everywhere. Certain states tax above a certain limit, and some just tax them like a C corporation.
Becoming an S corp isn’t possible for everyone. If you have more than 100 stakeholders and any stakeholders that aren’t citizens of the United States, you are out of luck. You can find other S corp criteria here.
Benefit corporations, or B corps, have missions similar to non-profit organizations, but they are, in fact, for-profit corporations. Their stakeholders have the goal of providing a public benefit, but they also want to see a profit.
Certain state governments also want to see that public benefit; some require B corps to submit benefit reports that prove they are contributing to the good of the public.
Even though they might have different purposes, B corps are not taxed differently from C corps.
A close corporation resembles the structure of a B corporation. Many of the rules associated with smaller companies also apply to close corporations.
With other types of corporations, anyone can own stock. If there is stock available and they have the money, it’s theirs. This is where close corporations differ: the stocks are owned by people who are closely related to the business.
Stockholders in close corporations benefit from liability protection while also being free of reporting requirements and pressure from shareholders who don’t know much about the business.
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Nonprofit corporations work in charity, education, religion, literature, or science. Because they exist to serve the common good, nonprofit corporations do not pay any state or federal taxes on their income.
To obtain this tax-exempt status, nonprofit corporations must register with their state, follow similar rules to standard C corporations, and all money must go back into the organization. In other words, profits can’t be distributed to the members of the organization. This does not mean nonprofits do not pay their employees.
| Pros | Cons |
| Limited liability for shareholders | The most complex and expensive business structure to form and maintain |
| Easier to raise capital by issuing stock | Corporations and shareholders both pay taxes |
| Perpetual existence (separate from owners' lifespans) | More regulations and paperwork |
A cooperative is a private business owned and operated by the same people who use its products and or services. The purpose of a cooperative is to fulfill the needs of the people running it. The profits are distributed among the people working within the cooperative, also known as user-owners.
The cooperative is typically run by an elected board, and members can buy shares to participate in the decision-making process.
| Pros | Cons |
| Democratic ownership | Complex to manage due to democratic decision-making |
| Often focused on social impact or community benefit | May have limitations on growth and profitability |
| Potential tax benefits in some cases |
Choosing the right business ownership style is an important and scary step for any burgeoning entrepreneur. There are a lot of solid options, all with compelling benefits and worrisome hindrances. Educate yourself on the myriad types of business ownership before making your decision.
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Mary Clare Novak is a Content Marketing Specialist at G2 based in Burlington, Vermont, where she is currently exploring topics related to sales and customer relationship management. In her free time, you can find her doing a crossword puzzle, listening to cover bands, or eating fish tacos. (she/her/hers)