One of the first steps in forming a business is choosing the right entity based on how you intend to structure your company.
There are five overarching types of business structures.
Types of business entities
The five main types of business entities include:
- A sole proprietorship involves a single owner with the sole responsibility for the business, including debts and profits.
- A partnership has more than one owner sharing responsibilities either equally or with one partner maintaining more control.
- A limited liability company allows one or more owners to limit personal responsibility for business issues.
- A corporation comes in different forms and is a completely separate entity from the owner.
- A cooperative distributes ownership among the people using it.
Before you choose an entity, consider how you prefer to structure your company.
Factors that affect your choice
Some factors affecting your choice include taxing, paperwork, liability, funding and hierarchy. Whether or not your business and personal income are separate will impact the tax burden. Additionally, the type of documentation you need, such as tax and registration forms, varies based on the business structure. The level of liability protection you prefer affects which entity you need, and certain business structures can block you from raising funds while others make it easier. How do you intend to structure operations in your company? A corporation needs a board of directors, but a partnership or LLC provides more control for the owners.
The process of registering differs based on the type of business structure. It is important to understand the state and federal regulations for each.
