What Is the Right Legal Structure for Your Small Business Idea?

Updated: Apr 5, 2021


Not sure which business entity type is right for you? There are a few different options depending on your business’s current needs. Here are the most common legal structures for small businesses.


Sole proprietorships


A sole proprietorship gives you total control of your business and doesn’t separate your business activities from your personal assets. While it’s one of the easiest business entities to form, you can be held personally liable for the debts and obligations of the business.


Partnerships


Partnership business structures give two or more people the option of owning a business together. Limited partnerships give one partner unlimited liability while the other gets a limited liability, including limited say within the company. Limited liability partnerships give liability to each owner, protecting them from debts against the partnership and one another’s actions.


Limited liability companies (LLC)


An LLC is the structure in between a sole proprietorship and a corporation. LLCs protect your personal assets from company debts, obligations, and potential lawsuits or bankruptcy. Business owners of this structure don’t have to pay corporate taxes, however, owners and employees are considered self-employed and must pay Medicare and Social Security taxes.


Corporations


C corp


A corporation, or C corp, is a legal entity entirely separate from its owners. Only C corps can be held legally liable, make a profit, and be taxed. Sometimes, they may have to pay taxes on their profits twice: once when the company makes a profit, and second when dividends are paid to shareholders. C corps can raise funds through the sale of stock and are separate from shareholders.


S corp


S corps are essentially the same as C corps but are designed to avoid their double taxation. S corps have profits and losses go through the owners’ personal income without being taxed. Each state has a different way of taxing S corps and must file differently with the IRS to get S corp status.


B corp


Also known as a benefit corporation, a B corp is a for-profit corporation that is different from C corps in their purpose but not in how they’re taxed. B corps have both mission and profit as their top priorities.


Close corporation


Close corporations have a similar structure to B corps but are more informal, making it more attractive to small businesses. Shares are usually barred from public trading and can be run by a group of shareholders without a board of directors.


Nonprofit corporation


Nonprofit corporations do charity, education, religious, literary, or scientific work. This business structure allows for nonprofits to be tax-exempt as they are doing work for the public.


Cooperatives


A cooperative is a business structure owned and operated by those who benefit from its services or products. The profits are distributed among the members, also known as user-owners. Regular members have voting powers over decisions while the elected board of directors and officers run the operation. Members can join by purchasing shares.


It’s possible to combine different structures to meet the needs of your business including tax requirements. Need help with the legal documents to solidify your business structure? Nolo and Law Depot both have the legal guidance and proper documentation to help you take the next step in your business model.


For more information and resources for aspiring solopreneurs and small business owners, head on over to www.mydreambridge.com.



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