Basic business structures explained

One of the most frequent questions from entrepreneurs is which business structure they should use for their startup.  

There are advantages and disadvantages to each type of entity, and only by thoroughly understanding each one can you identify the best course for your company at its current stage.

Each business entity will have different rules for taxation, as well as different levels of liability for the owners.  Each structure has different reporting requirements, and different levels of required licensing.

With that in mind, the following entities are the most basic, and most often used, start-up business structures:

1. Sole Proprietorship - One individual or married couple in business alone. In this structure the owner(s) is personally liable for all debts incurred by the business, and may also be held liable in the event of lawsuits against the company arising from business situations.  Sole proprietorships are the most common form of business structure for start-ups and generally require the least amount of start-up capital and legal paperwork.
2. General Partnership - Composed of two or more persons.  Each partner shares the profits, losses, and management of the business, and each partner is personally and equally liable for the debts of the partnership.  A simple partnership agreement is used to establish this business and the working relationship between the partners.
3. Limited Partnership (LP) - Composed of one or more general partners and one or more limited partners.  The general partners manage the business and share fully in its profits and losses.  Limited partners share in the profits of the business, but their losses are limited to the extend of their investment. Limited partners are usually not involved in the day-to-day operations of the business. This structure is beneficial for those companies with investment or money partners who want an upside on their investment without the time consuming operations end of the business.  This can be an effective structure for taking investments from family members who want to formalize an agreement for their investment.
4. Limited Liability Partnership (LLP) - In this partnership arrangement, the partners do not have personal liability for the negligence of another partner.  This business structure is used most commonly by professionals such as accountants and lawyers.
5. Corporation - As a chartered legal entity, a corporation has certain rights, privileges, and liabilities beyond those of an individual.  Doing business as a corporation may yield tax or financial benefits, but these can offset by other considerations, such as increased licensing fees or decreased personal control.  Corporations may be formed for profit or nonprofit purposes.
6. Limited Liability Company (LLC) - An LLC is formed by one or more individuals or entities through a special written agreement.  They are permitted to engage in any lawful, for profit business or activity other than banking or insurance.  An LLC can take one or more forms of the entities listed above.

If you're planning a startup and are not sure where to start we recommend you have a conversation with a qualified attorney and tax professional for two reasons:

• Any business structure you choose will have legal ramifications, and will ultimately require certain federal, state, and /or local licensing.
• Your business will also have tax ramifications, and only a qualified tax professional can tell you how each business structure fits into your own personal tax risk tolerance.

There are also qualified business consultants who can further explain business structures and the requirements for licensing and starting any one of the business entities listed above.