By Staff Writer | 04/30/2025
There are several types of business structures you should be familiar with before you form a for-profit company. Ultimately, the “right” structure for your business entity depends on a handful of factors.
For example, will you need to raise capital before you can conduct business? Do you expect to work with partners? Addressing these types of questions before you choose a business structure is a must. At the same time, your long-term goals for your organization could make certain types of legal structures more suitable than others.
Common Business Structures
“The most common business structures used in small business include sole proprietorships, partnerships, limited liability companies, and S corporations. They are distinct in several ways. I have experience with each one,” says Dr. Susie Pryor, an adjunct professor at American Military University’s Dr. Wallace E. Boston School of Business.
Sole Proprietorships
Unlike other business structures, a sole proprietorship is not a distinct legal business entity. Rather, the business owner – also known as the “sole proprietor” – and the business are one and the same. Similarly, business assets and liabilities double as personal assets and liabilities.
“A sole proprietorship is merely an extension of its owner. This structure is commonly used by home-based businesses or individuals who grow their hobbies into side hustles,” Dr. Pryor explains. “Income and losses are reported on the owner’s personal tax return,” she adds.
Forming a sole proprietorship is as simple as selling products or services; there is no official paperwork to file. Still, this simplicity comes at a high cost: unlimited liability.
A sole proprietor is personally liable for all business debts and obligations. Consequently, personal assets may be seized if a sole proprietor defaults on debt or loses a lawsuit.
“Because there is no formal legal entity, the owner may be exposed to personal liability to a greater extent than owners of LLCs and S corps. One solution to this problem is the maintenance of personal liability insurance,” says Dr. Pryor.
Partnerships
If you are planning to start a small business with somebody else, then you might be interested in forming a partnership. Unlike a sole proprietorship, a partnership is a separate entity from its owners.
Partnerships must obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). An EIN enables an organization to open a business bank account. EINs are also necessary for preparing tax returns.
According to the U.S. Small Business Administration (SBA), “Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.”
As the Internal Revenue Service mentions, there are numerous types of partnerships. Still, the three most common types are general partnerships, limited partnerships (LPs), and limited liability partnerships (LLPs).
General Partnerships
As Andrew Bloomenthal of Investopedia writes, general partnerships are unincorporated businesses owned by at least two people. All partners must be personally liable for business debts and obligations.
Bloomenthal also recommends establishing a written partnership agreement to outline key details about the business, including:
- Management structure and style
- Conflict resolution protocols
- Compensation and fund allocation
- Joint liability
- Partners’ fiduciary duties
Like sole proprietorships, general partnerships are pass-through entities. In other words, profits and losses “pass through” the organization. Partners report these figures on their personal tax reports and pay taxes on the business income accordingly.
Limited Partnerships
Per the SBA, a limited partnership has just one general partner who carries unlimited personal liability. This general partner also pays self-employment taxes but has the most control over the organization.
The rest of the partners have limited personal liability, as well as limited control over the business. As the SBA explains, an LP details each partner’s rights and responsibilities in a formal partnership agreement.
Limited Liability Partnerships
Unlike a limited partnership, a limited liability partnership offers limited liability protection to all owners. The LLP business structure also prevents partners from being responsible for one another’s actions, according to the SBA.
Limited Liability Companies
A limited liability company (LLC) offers its owners limited personal liability protection. Limited liability companies are also pass-through entities, but members must pay self-employment taxes, as the SBA notes.
Dr. Pryor is well-versed in the pros and cons of this business structure. “LLCs have become increasingly common. The 'limited liability company' structure was designed to allow parties to benefit from the tax advantages of a partnership and enjoy some of the personal protection associated with corporations.
“LLCs require state registration, and, in most states, these are easily formed online and entail creation of a simple operating agreement. While theoretically LLCs shield individual owners from liability for personal debts, it is common for suppliers and vendors to insist on individual owners’ personal guarantees, particularly for new businesses,” she says.
There is no limit on the number of members an LLC can have. In fact, most states allow LLC members to include individuals, corporations, other LLCs, and even foreign entities, according to the IRS.
The IRS also states, “A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information.”
Corporations
A corporation is a type of business structure that’s particularly well-suited to entrepreneurs focused on rapid growth. As the SBA states, “Corporations can be a good choice for medium- or higher-risk businesses, those that need to raise money, and businesses that plan to ‘go public’ or eventually be sold.”
For-profit businesses can choose from several types of corporate structures: C corporations, S corporations, benefit corporations, and close corporations.
C Corporations
A C corporation (also known as a C corp) is a legal entity that is separate from its owners, per the SBA. The formal requirements for forming a C corp, however, make launching this type of business structure relatively expensive.
“Corporations also require more extensive record-keeping, operational processes, and reporting,” the SBA says.
Because forming and maintaining a C corp is relatively complex, small business owners rarely choose this structure, Dr. Pryor explains. Still, there are some advantages to owning a C corp, as she points out.
“C corps allow owners to avoid passing profits and losses through individual owners’ tax returns. In my case, once my LLCs were no longer losing money – a benefit on my individual tax return as it reduced my tax burden – I shifted each business to a C corp.
“Here is an example of how this structure works. One of my retail stores was making money by year four. However, I was reinvesting these profits into improvements, equipment, and inventory.
“Despite the fact I made money, it was not in my bank account. The C corp structure allowed me to build the business’s equity without placing me in a higher tax bracket and forcing me to pay additional taxes.”
S Corporations
An S corp “is a special type of corporation that’s designed to avoid the double taxation drawback of regular C corps,” the SBA states. Ultimately, taxes for S corps vary from state to state, and some states don’t even recognize this business structure.
Nonetheless, eligible business owners must file with both the IRS and their respective states to form S corps. The IRS website states that a corporation must meet these requirements in order to elect S corp status:
- The organization must be a domestic corporation.
- Shareholders may be individuals, certain trusts, and estates; they may not be partnerships, corporations, or non-resident alien shareholders.
- The company must have no more than 100 shareholders.
- There must be only one class of stock.
- The organization cannot be an ineligible corporation, which the agency defines as, “certain financial institutions, insurance companies, and domestic international sales corporations.”
Per the SBA, forming an S corp could be a practical choice for a business owner whose organization would otherwise be C corp but meets the criteria to elect S corp status.
Benefit Corporations
Benefit corporations are taxed the same way as C corps, but they differ “in purpose, accountability, and transparency,” per the SBA. Not to be confused with Certified B corporations, benefit corporations exist to contribute to the greater good while still earning a profit.
Close Corporations
Close corporations are businesses that “shed many formalities that typically govern corporations and apply to smaller companies,” the SBA says. “State rules vary, but shares are usually barred from public trading. Close corporations can be run by a small group of shareholders without a board of directors.”
The close corporation business structure might be a particularly attractive option for family-run businesses.
Cooperatives
The SBA defines a cooperative as “a business or organization owned by and operated for the benefit of those using its services.” Members are known as “user-owners,” and they each receive a portion of the profits and earnings.
A cooperative usually has an elected board of directors and officers. These individuals run the organization, though the rest of the members have voting rights.
Entrepreneurship Degrees at American Military University
In addition to choosing a business structure, there are dozens of other important decisions an entrepreneur needs to make. From forming a legal entity to overseeing day-to-day operations, running a company is an enormous responsibility – and a truly fulfilling endeavor.
American Military University (AMU) offers online degree programs for students interested in learning more about starting their own businesses and avoiding common small business mistakes:
Taught by experienced instructors, courses in these programs explore topics such as idea generation, innovation design and prototyping, and the foundations of entrepreneurship. Other courses involve legal practices for entrepreneurs, venture capital, and the fundamentals of business analysis.
These programs have received specialty accreditation from the Accreditation Council for Business Schools and Programs (ACBSP®). This specialty accreditation ensures that the courses in these degree programs have met rigorous academic standards.
For more details, visit AMU’s business administration and management program page.
ACBSP is a registered trademark of the Accreditation Council for Business Schools and Programs.