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Multiple business structures exist in the United States, and it can be extremely overwhelming to choose which one best suits you and your new enterprise.
Well, don’t worry! You’re in the right place. Whether you’re an entrepreneur, business owner, start-up founder, professional, or anything in between, this article is your one-stop shop.
In this article, I will extensively cover 10 of the most common business structures in the US with relevant examples, tips, and misconceptions.
So what are we waiting for? Let’s get into it!
10 different business entity types in the U.S.
- Limited Liability Company (LLC)
- General Partnership
- Sole Proprietorship
- C Corporation
- S Corporation
- Limited Partnership (LP)
- Limited Liability Partnership (LLP)
- Nonprofit Organization (NPO)
- Benefit Corporation
- Joint Venture
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1. Limited Liability Company (LLC)
If you want the perfect blend between the limited liability of a corporation and the ease of a partnership, an LLC is the go-to business structure.
You wouldn’t be alone in choosing one either, as the IRS reported a 66% rise in LLCs from 2005 to 2014 – making it one of the most popular business structures in America.
However, this does not mean that it’s easy, as an LLC can only be successful if a clear distinction is made between personal and business finances.
Proper record-keeping is a must if you want to guarantee complete protection. A great example of an LLC is Airbnb.
Founded in 2008, Airbnb has been able to leverage the advantages of an LLC to allow individuals to rent their homes without risking personal assets.
2. General Partnership
If you and someone have gone into a business together, consider forming a general partnership.
This is when two or more individuals share the ownership and responsibilities of a business.
Some may believe that these partnerships have the potential to be unstable. However, when both partners are clear on their position and goals, these companies thrive!
Love ice cream? Ben & Jerry’s was originally a general partnership as it was the easiest way to highlight the founders’ shared vision and utilize their complementary skills.
3. Sole Proprietorship
For those who prefer to work alone, a sole proprietorship might be the best setup for you!
In fact, 73% of all U.S. companies are owned and operated by one individual. Real-life examples of sole proprietorships exist all around you.
Most local businesses (such as the bakery down the street, or the guy who owns the store on the corner) are run by sole proprietors.
These individuals manage all aspects of the business, from payroll to customer service.
A big misconception surrounding sole proprietorships is that they provide limited liability protection to the owner.
This is not the case. Unlike LLCs, There is no legal separation between the business and the owner, so it is important to consider this factor before forming one.
4. C Corporation
Similar to the LLC, a C Corporation provides limited liability and opportunities for investment by existing as a separate legal entity from its owners.
This means that owners are instead considered shareholders with ownership represented as “stock”.
C corporations can be found in all industries from technology and manufacturing to finance – and even healthcare.
They are very legally complex, and as such, consistent legal advice is a must. Real-life examples include The Coca-Cola Company and Apple Inc.
These C Corps raise capital through public trading to fund their ever-growing global business.
Much like LLCs, C Corporations don’t just suit big companies but small ones too.
Many family-run businesses actually exist as C Corps to make use of their numerous benefits.
5. S Corporation
S Corporations combine the limited liability of a C Corporation with the pass-through taxation of a sole proprietorship.
Pass-through taxation is when business income moves directly from the company to the owner’s personal tax returns.
According to the Bureau of Economic Analysis, the number of S Corporations increased by over 4 million from 1980 to 2017.
However, not all businesses are eligible to become S Corps, as you require fewer than 100 shareholders and only one class of stock.
Additionally, S Corps cannot have any foreign ownership; all owners must be U.S. citizens or residents.
6. Limited Partnership (LP)
Limited Partnerships exist with both general and limited partners to accommodate those who wish to have liability protection but no active role in management (and vice versa).
Because of this distinction, it is important to hire partners that suit the respective roles of general and limited partners.
General partners must be able to manage a business, and limited partners must have the capital to support it.
The emphasis is very much put on “limited” here. Contrary to what some may believe, limited partners have little to no involvement in the day-to-day operations of the company.
7. Limited Liability Partnership (LLP)
In an LLP, individual partners are not personally liable for the decisions of other partners.
Law firms are common general partnerships as they allow lawyers with differing specialties to work together for a range of clients.
In fact, at least 85% of the top 350 law firms in America are LLPs. A top tip for these companies is to research regulations and licensing requirements as they often differ from state to state.
They are also used in a variety of other industries such as accounting, architecture, and consulting.
8. Nonprofit Organization (NPO)
Nonprofit Organizations are perfect for entities that exist to serve the public and not for financial gain.
According to the IRS, 1.5 million nonprofits operate in the United States as of 2016, including The American Red Cross which focuses on community outreach and disaster relief.
These organizations make use of tax exemptions to provide as much aid as possible.
For a successful NPO, it is important to have a clear mission statement. NPOs can generate revenue, but it must be solely for the purpose of supporting said mission.
9. Benefit Corporation
Similar to an NPO, Benefit Corporations exist to serve society and the environment, but differ in that they work for profit.
They are recognized as legal entities in over 40 U.S. states. However, as they are for-profit but often work with serious humanitarian issues, it is important that their mission and financial reporting are fully transparent to avoid controversy.
The motive for profit is also not self-serving as often perceived, but rather to facilitate growth and expansion of operations.
10. Joint Venture
For businesses wishing to exist for a finite period of time, a joint venture is for you. This is a temporary partnership structure that allows you to combine expertise to fulfill a specific project or goal.
Joint Ventures are often formed when multiple companies want to enter international markets together, two businesses wish to co-develop a product, or when manufacturers work closely with suppliers.
As they only exist for a short period and often concern very important business activity, it is vital that these ventures are planned thoroughly and the viability of the partnership is assessed.
Which business structure should I pick?
In summary, multiple business structures exist in the United States – each with its own pros and cons.
It is now up to you to decide which one suits you and your partners best before you can start bringing in the profits.
So, good luck! Hopefully, I’ve given you the ideal stepping stone to create the perfect business.
It’s now up to you to achieve it.
Kickstart your business in minutes with LegalZoom's business formation services.