Knowing the 7 Common Types of Business Structures

Opening a business can be one of the most exciting and proud experiences imaginable. Working hard to find the perfect location, deciding on the type of market you’ll be in and finally opening your doors to the world are just some of the things you’ll have to follow through with before making a name for yourself. But before deciding on what you’ll sell and who your customer base will be, you’ll first have to choose which business structure to follow.

There are seven main structures that all businesses in the United States fall into:

  • Sole Proprietorships
  • Partnerships
  • Limited Partnerships
  • Limited Liability Corporations/Companies
  • Corporations
  • Nonprofits
  • Co-ops

Do you have an idea which structure to adopt? If not, then read on to explore what each is about and its benefits.

Starting a business can be hard, and dealing with the legalities of doing so can be nerve-racking. Reach out to us for the legal guidance your company will need to succeed.

Sole Proprietorships and Partnerships

These business structures are perhaps the simplest. With a sole proprietorship, an owner will not be required to file papers or pay fees to establish one. If you decide on this option, you are literally your own boss as you will be the only employee. Also, you will be required to pay taxes on business profits as income on your personal taxes. If your sole proprietorship has liabilities like debt, you, and only you, are personally responsible for them.

A partnership’s structure is similar except now there is more than one owner. The owners of a partnership also aren’t required to file paperwork or pay fees to get started. Each partner will be required to report their shares of profits on personal taxes as income and are individually responsible for liabilities.

Limited Partnerships

When discussing limited partnerships, the differences start. A limited partnership can be both complicated and expensive to establish. These business types are typically organized by more than one person, referred to as the “general partners”. General partners oversee day-to-day operations and are personally responsible for any potential liabilities. Also, general partners share and report business profits in their personal taxes.

Limited Liability Corporations/Companies and Corporations

Small businesses usually adopt a limited liability corporation/company (LLC) structure depending on the field it works in. This type is more complex and expensive than most structures, but the benefits can be plentiful. One of the biggest advantages of an LLC is that, as its name implies, it is shielded from personal liabilities, like debts, that might arise during its operation.

It’s important to remember that LLCs are not their own separate tax entity. Its owners must pay personal income taxes on their own share of profits that the company earns during the tax year. Corporations are a bit different. What sets LLCs and corporations apart is that a corporation is its own legal and tax entity. They pay their own taxes on profits and its owners only need to pay income taxes on whatever is earned through the company. This includes salaries, bonuses and dividends.

It advised to strongly consider these two structures for two reasons. First, if the business is at risk of facing a lawsuit or accumulating significant debt, then an LLC or corporation can shield the owners from facing personal liabilities. Second, if the owners of either structure own significant amounts of personal assets they want shielded from liability, they’ll be protected.

Nonprofits and Co-ops

Nonprofits are unique entities. They are simply corporations formed with the intent to carry out charitable, literary, educational, religious, or other purpose. Nonprofits solicit charitable contributions from the public and are allowed to raise funds through grants from other companies or individuals. A major benefit of creating a nonprofit is that funds collected for charitable purposes aren’t taxed by the state or federal government.

On the other hand, co-ops are businesses associated with grassroots organizations. These entities are owned and operated by its members in a democratic fashion. Consumers wanting to establish a friendlier business climate mostly form co-ops. These business types are typically grocery stores or childcare centers. Many states have laws regarding co-ops, so get in touch with us to learn what they are.

Are You Ready for Business?

The commercial lawyers of Barrera, Sanchez & Associates, P.C. are ready to sit down with you to form and execute a business plan tailored for your success. We also help established companies facing any legal issues. If you aren’t sure which business type to follow or need legal guidance for your business, then get in touch with us in McAllen to get started.

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