Small business types
What is a sole proprietorship, an LLC and other small business types — and which one is best for you?
Starting your own business can be a vehicle for anything, from a side hustle to a full-time career. Many people do it. In 2021, 61.2 million people — or 46.8% of U.S. employees — worked for a small business.
Before you declare yourself open for business, however, a few important decisions can help lay a solid foundation. One is the legal form of your business — anything from an LLC to a subchapter S, to name just two. There are several different types of small businesses, and your choice can impact your taxes, liability, expenses, paperwork and the ability to raise funds. Here's a brief overview of the six main small business types.
What is a sole proprietorship?
- Definition - A sole proprietorship is the simplest form ― and the IRS default if you don't declare one. Usually it is just one owner/operator who has complete control. A few sole proprietorship examples are freelancers, bakers, landscapers, direct sellers and others.
- Taxes and reporting - All business income or loss is reported on your personal tax return, but self-employment taxes must be paid and, depending on income, quarterly payments may be required.
- Good to know - With this type, you and your small business are one and the same, which means you can be held personally responsible for any debt or legal claim. Banks might be hesitant to lend to sole proprietors.
What is a partnership?
- Definition - Partnerships generally have two or more owner/operators and may be either general or limited. In a general partnership, the individuals take equal responsibility for management, debts, etc. In a limited partnership, one or more partners operate the business while "limited partners" provide investment, generally have no control and are liable for up to the amount of his/her contribution. Individuals and businesses typically form partnerships in order to gain synergy and share resources.
- Taxes and reporting - With a general partnership, business income or loss is passed through to personal tax returns, and you and your assets can be held responsible for any debt or legal claim.
- Good to know - The limited variety is a much more complicated structure (administratively) than a general partnership.
What is an LLC (Limited Liability Corporation)?
- Definition - A Limited Liability Company (LLC) or Partnership (LLP) offers owners/operators a way to separate their personal assets from their business. They are kind of hybrids of sole proprietorships/partnerships and corporations.
- Taxes and reporting - Business income or loss is passed through to personal tax returns, and all members are allowed full participation in the business.
What is a subchapter C corporation?
- Definition - Known as C-corps, traditional corporations are totally separate legal entities from any individual. The biggest benefit of this structure is that personal assets are protected from risk. C corporation examples include McDonald’s or Apple.
- Taxes and reporting - Subchapter C corporation benefits include the ability to raise funds, but these are often offset by high administrative costs and complex rules and formalities that differ state to state.
- Good to know - C-corps are subject to double taxation of earnings ― once as business income and again as personal income when dividends are paid to shareholders.
What is a subchapter S corporation?
- Definition - The S-corp is attractive to small business owners because it provides the liability protections of a C-corp without the double taxation.
- Taxes and reporting - Subchapter S corporations are still subject to much of the administrative expenses and rules of a traditional corporation.
- Good to know - S-corps are limited to just 100 U.S. citizen shareholders and one class of stock.
Other small business options
There are other business frameworks to consider if your business’ purpose and mission are focused on giving back to the community. Here are a few.
- Benefit corporations (B-corp) - The (B-corp) is a for-profit corporation that must have the objective and goal to benefit the society, community or the environment. As consumers are increasingly interested in sustainable companies, this type of corporation encourages social responsibility.
- Close corporations - This business type includes companies whose shares are held by a small group of individuals or entities of which are all associated closely with the company. Close corporations are also known as privately held companies, family corporations, or incorporated partnerships, among other names.
- Nonprofit corporations - This is an organization formed with the intent to serve the public good. Examples are religious and educational organizations, charities or other public service organizations. A primary benefit of forming a non-profit is the ability to receive and attract private funds and donations. Starting a nonprofit is very much like starting a business but you have donors instead of investors.
- Cooperatives (co-op) - A (co-op) is a private organization that is owned and managed by member-owners who benefit from its goods or services. The intent is to fulfill a common need of the members. Needs may range from improved services or swift and easy access to unobtainable supplies. Member-owners can be individuals, businesses, or other groups who join voluntarily and are willing to work toward a shared goal. Below are just a few examples.
- Producer cooperatives - Typically owned by member growers or producers
- Worker cooperatives - Businesses owned by their workers
- Housing cooperatives - Resident-owned communities
- Credit unions or other non-profit organizations – These are intended to serve their members
- Mutual insurance companies – Companies that are owned by policyholders
- Purchasing cooperatives - Several businesses who have joined together to get better discounts or offers on products
Be sure to consult with a business attorney and tax professional to choose a structure that offers stability for you. Check out these other small business articles to get your business moving.