Starting your own business 101: Types of business structures

Starting a new business can be a life-changing endeavor. As exciting as it is, there are also many big decisions, including the initial choice of business structure. The structure of a business has many downstream effects, including tax burden, annual paperwork requirements and even a degree of personal liability, should the unforeseen occur.

There are a number of options to choose from when starting a business, from sole proprietorships to LLCs, C corps, S corps and beyond. It's normal for new business owners to feel confused, and many decide to seek legal guidance. Here, we offer an overview of the most common types of business structures, along with pros and cons of each type.

Choosing the right business structure is essential for success.

The sole proprietorship
Perhaps the simplest form of business ownership is a sole proprietorship. Anyone who conducts business without a prior designation is considered a sole proprietor by default. However, in exchange for the perk of simplicity, there's the risk of personal liability. Because a sole proprietor is, in essence, the same as their business, the law doesn't distinguish a sole proprietor's personal assets and liabilities from those of their business. This is something to keep in mind, particularly if your business activities put you at risk of being named in a lawsuit.

Limited Partnerships/Limited Liability Partnerships
Both limited partnerships (LPs) and limited liability partnerships (LLPs) are good "starter" options for people looking to share a business. Like a sole proprietorship, both LPs and LLPs involve some degree of personal liability. However, the extent depends on a predetermined stake in the business, which is typically written into a business plan. This option can be ideal for professionals working together within a practice, for example, attorneys. However, it's important to understand specifics before signing in to this type of arrangement.

Limited liability corporations
Limited liability corporations (LLCs) offer the best of both worlds, as far as combining the relative simplicity of an LLP with the protection of a corporation. Like an LP or LLP, an LLC does not subject income to corporate taxes; similar to a corporation, there's a distinction between personal assets and professional liability, making this an enticing option for those in medium- or high-risk professions.

C corporation
C corporations ("C corps") offer the strongest distinction between personal assets and professional liability. The C corp operates as its own entity, for the purposes of both income and taxation. If a C corp is sued, its owners will be protected. In addition, C corps can sell shares of stock to raise capital. In exchange for these benefits, however, a C corp is more complex to register, and annual filing requirements can prove burdensome. Further, income can be subject to both corporate and personal tax, making it less appealing in some instances.

S corporation
An S corporation ("S corp") offers a happy medium for those desiring the personal asset protection of a C corp, without the double taxation (in most states). The trade-off for this win/win arrangement is stricter regulations as far as which businesses can qualify to register, which can be found here.

There are several other types of business structures not discussed in this post, including B corporations, close corporations, nonprofits and co-operatives ("co-ops"). Keep in mind that no matter which type of business you choose, it's never a bad idea to get the input of an attorney when starting a new business. If you have any questions or would like legal input at any point during the process, please reach out to the professionals at the Law Offices of Donald W. Hudspeth, P.C.

Categorised in: Starting a Business in Arizona

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