Choosing the type of ownership your business operates under is one of the most important decisions you’ll make when starting your business.
In the United States, small business owners can operate under six types of ownership. Each type of business ownership comes with its own financial (taxes, loan eligibility, etc.) and legal (risk exposure, governance, etc.) benefits.
Keep reading to learn more about the six types of small business ownership and which is suitable for your company.
A sole proprietorship does not require registration on a state level (although local registration may be required). Because there are no state-level start-up fees or paperwork associated with this type of business ownership, any individual operating a small business qualifies automatically as a sole proprietorship.
When it comes to taxes, sole proprietors file personal income taxes, with a profit or loss statement included. Business owners can also deduct expenses associated with their company from their personal tax returns.
Best For Individuals or married couples who operate their business independently and are looking for the least expensive and quickest option for forming a business.
Doesn’t work for: Partnerships with more than one person sharing a business and/or individuals unwilling to assume personal liability for their business.
Because sole proprietorships expose business owners to personal legal and financial risks, many small business owners choose to shift their business ownership to a limited liability company (LLC).
The upfront cost to register an LLC — both in time and money — is a bit more than a sole proprietorship. However, LLCs still retain the right to choose how they prefer to be taxed (as a corporation or partnership).
Best for: Business owners who are looking for a flexible type of ownership and are willing to invest more in upfront costs, compared to a sole proprietorship which has the benefit of removing personal liability.
Doesn’t work for: Business owners who are just getting started and want to avoid upfront costs.
If two or more owners or partners run your business, then a partnership might be the way to go. Depending on the involvement of each partner, your business may fall into one of two types of partnerships.
Similar to sole proprietorships, general partnerships do not require registration at a state level. Any multi-owner business that does not register under a different type of ownership is automatically considered a general partnership.
In a general partnership, partners share profits or losses. From a tax perspective, owners file personal income taxes only and deduct losses from their personal tax returns.
Best for: Businesses with more than one owner who each plan to assume legal and financial responsibility for the business.
Doesn’t work for: Partners who want more legal protection and are unwilling to assume personal liability for their business.
You may qualify to register as a limited partnership if your business is owned by partners with different levels of involvement (ex: investors or silent partners),
Limited partnerships protect investors from personal liability while allowing owners to maintain a division of authority over the business. In other words, owners operate the business and assume most legal and financial liability, while investors can come and go from the partnership by providing financial support.
Best for: Partnerships that involve different levels of financial investment and control over the company.
Doesn’t work for: Partnerships where each owner is equally invested or businesses that aren’t ready for the financial commitment of registering a limited partnership.
Corporations provide more structure (ex: board of directions, by-laws, and the option to have shareholders) than sole proprietorships, LLCs, or partnerships. However, these types of business ownership provide added legal protection to businesses. Business owners interested in registering as a corporation can choose from S corporations (more common for small businesses) or C corporations.
S corporations function similarly to a partnership in that owners of an S corporation file the company’s profits or losses as part of their personal tax returns. However, unlike less formal business structures, S corporations are subject to corporate formalities, including the need for by-laws and a board of directors.
Best for: Businesses looking for the added legal protection that comes with registering as a corporation but without the double taxation (corporate and personal income taxes) that occurs with C corporations.
Doesn’t work for: Small businesses that are not prepared to invest in the start-up costs associated with registering an S corporation or any company that does not want to manage the corporate regulations required of a corporation.
When you’re just starting, your business may not need the structure and benefits that come with registering as a C corporation. This option typically only makes sense for small businesses that plan to scale quickly and want total separation between the company and personal finances and liability.
In a C corporation, both the business and owners receiving profits or dividends pay taxes separately, which means as an owner, you may be subject to double taxation — once as the corporation and once as a shareholder. However, C corporations provide the most legal protection for business owners.
Best for: Small businesses that plan to grow quickly and bring in shareholders or invest a majority of profits back into the business.
Doesn’t work for: Small businesses that are not prepared to invest in the start-up costs associated with registering and C corporation or any company that does not require the legal benefits afforded to or corporate structure required of C corporations
There is no rubric to determine which type of ownership makes the most sense for your business. You may decide to reevaluate your business ownership set up as your company grows and evolves (ex: growing from a sole proprietorship to an LLC).
Once you’ve landed on a decision, it’s important to work with a business lawyer or accountant to ensure your business is set up correctly with the state you operate in, if applicable.
We hope this article provided you with valuable guidance to make an informed decision on which type of business ownership is best for you!