Your business type is no mere administrative detail. How you structure a business determines things like corporate and personal taxes, your exposure to legal risks, your day-to-day operations, and your long-term growth plans. Ask yourself questions about how you see your business in both the near and distant future. Are you risk averse? Does a version of success as you see it involve selling your business? Do you want to be a publicly traded company?
The type of business you choose to register will also impact your financial liability for any business debts. If you apply for investment or funding, your business type will again affect your options.
Given the ramifications of your chosen business structure, and the 10 different types available for your small business, you likely have questions. Here’s a breakdown to help you decide which business structure is right for you.
10 types of business structures
Sole proprietorship
General partnership
Limited partnership
Limited liability partnership (LLP)
C corporation
S corporation
Benefit corporation
Limited liability company (LLC)
Nonprofit
Joint venture
The way you organize your business depends on whether you are acting alone or with partners, how much personal liability you’re willing to accept, whether you need to issue shares, and the types of licenses and insurance your business needs. Here are 10 types of business structures to consider:
1. Sole proprietorship
A sole proprietorship is an unincorporated business entity owned and operated by a single individual. Its main advantage lies in its simplicity: sole proprietorship is the default business entity designation for anyone selling a service or product themselves. A sole proprietorship requires no special filing. In addition, sole proprietors have complete control over their companies and enjoy a single round of taxation on personal income.
Nevertheless, the ease of setting up a sole proprietorship is a double-edged sword, because this business type offers the lowest protection for owners. As a sole proprietor, you are fully liable for your company’s financial and legal situation, which is legally riskier when compared to an LLC.
This means that if your business falls on hard times, your personal assets may be drawn on to settle business debts.
💡 Shopify’s suite of tools can help sole proprietors manage their orders, inventory, taxes, marketing, and more.
2. General partnership
General partnerships (GPs) are the default form of business partnerships, or businesses owned by two or more people.
Like sole proprietorships, general partnerships are subject to pass-through taxation, meaning they are only taxed once, at the partners’ personal income levels. In addition, general partners are equal participants in the firm, meaning everyone has a say in how the business operates.
However, general partnerships are vulnerable to some of the same drawbacks as sole proprietorships. Because there is no legal distinction between the general partners and the partnership itself, all owners are subject to unlimited liability for the company’s debts and damages.
Creditors and lawsuit plaintiffs can reach partners’ personal assets, and general partners are liable for the business conduct of all other partners—so choose your co-founders wisely.
3. Limited partnership
Similar to general partnerships, two or more people own limited partnerships (LPs) and enjoy pass-through taxation. The key difference between LPs and GPs is the existence of limited partners, people have limited liability for the business according to the amount of capital they’ve invested.
💡 All limited partnerships must have at least one general partner, who is subject to unlimited liability.
4. Limited liability partnership (LLP)
The final type of partnership, limited liability partnerships (LLPs), are owned by two or more partners who enjoy pass-through taxation. While partners in an LLP are liable for their own conduct, they are not personally liable for the conduct of other partners or the debts and damages of the business.
An LLP business structure provides additional separation between personal and company assets. Unfortunately, however, LLP status is not available to all types of businesses; it’s exclusive to certain licensed professions, such as law or accounting.
5. C corporation
C corporations, or C corps, are among the most common types of corporations and the ideal ownership structure for a large company. A C corporation is a legal entity completely separate from its owners, offering the strongest personal liability protection.
Another advantage of forming your small business as a C corporation is the relative ease of fundraising. C corps can be funded by issuing shares of stock. You can issue as many shares as you like and offer both common stock and preferred stock types.
One drawback of C corporations compared to other types of businesses is that each C corporation is a complex business organization requiring a detailed filing and registration process, as well as oversight via the drafting of bylaws and appointment of a board of directors.
Above all, the main downside of forming a C Corp is that you will not enjoy pass-through taxation status. That means C corporations pay income tax twice: once on corporate income and again on the personal income of owners and shareholders.
💡 C corporations can design bespoke commerce solutions for their business needs with Shopify.
6. S corporation
S corporations, or S corps, sidestep the double taxation issue that C corps face. Like partnerships, S corps are pass-through entities, which means that instead of paying corporate income tax as a business entity, they are taxed only once at the owners’ and shareholders’ personal income levels. Choosing between an S corp or LLC is a common decision for business owners.
That advantage is offset by limits on fundraising and strict requirements for maintaining S corp status. For instance, S corps may only issue common stock to a maximum of 100 shareholders, and those shareholders must be individuals who are citizens or permanent residents of the United States.
7. Benefit corporation
A benefit corporation, sometimes called a B corp, is a different type of for-profit corporation recognized by most US states. While they’re taxed the same way as C corps, benefit corporations place added emphasis on making a positive impact on local communities and the environment.
While a benefit corporation can both do good and generate profits, it’s subject to the same requirements as C corporations. Plus, a benefit corporation must demonstrate its commitment to a higher calling by publishing an annual report assessing its social and environmental performance.
8. Limited liability company (LLC)
Limited liability companies (LLCs) meld many of the characteristics of a partnership with those of a traditional corporate legal entity. LLCs are distinct legal entities, which helps to protect owners from personal liability for any debts and damages accrued by the business.
An additional advantage of forming your small business as a limited liability company is tax flexibility. LLCs can opt to be taxed as corporations (twice) or as pass-through entities like sole proprietorships and S corps.
The downside of forming a limited liability company is that the registration process is more complex than with sole proprietorship or partnerships. For instance, an LLC must write and file articles of incorporation and appoint a registered agent.
9. Nonprofit
A nonprofit is a business that has been granted tax-exempt status by the US Internal Revenue Service (IRS) on the basis that it advances a social cause benefiting the public. In essence, nonprofit refers primarily to a business’s tax status, as most nonprofits are also corporations.
The main advantage of forming your small business as a nonprofit is the tax benefit; if your organization qualifies as a 501(c)(3) tax-exempt organization under the Internal Revenue Code, it won’t have to pay federal income tax.
Nevertheless, nonprofits are limited in the business activities they can pursue and must reinvest all profits into the business.
10. Joint venture
A joint venture is essentially a partnership between one or more separate business entities. In these types of business arrangements, firms agree to pool resources toward the achievement of a specific task—often on a temporary basis.
Businesses might undertake joint ventures to win a contract, purchase real estate, or respond to changing industry regulations.
The upside of joint ventures as a business structure is that they allow participants to benefit from the resources of other participating firms without forfeiting independence by merging them into one organization. The main disadvantage, however, is that each participant is responsible for all the costs and losses of the joint venture.
Helpful resources:
How to choose the right business structure
Assess your risk tolerance
Understand tax implications
Evaluate control and management needs
Consider funding options
Consider future growth and scalability
Set personal and business goals
1. Assess your risk tolerance
When figuring out your risk tolerance, think about how comfortable you are with potential financial and legal risks. Some key points to consider:
How important is it to keep your personal belongings separate from your business?
What’s the likelihood of your business facing legal challenges?
Are you OK with taking on business debt, or does that make you nervous?
Imagine you’re starting an online store selling custom-printed t-shirts. Your risk level might seem low at first glance, but there are still factors to consider. What if a shirt’s design infringes on someone’s copyright? Or what if the dyes cause allergic reactions in some customers?
If you aim to become the next big thing in online fashion, you might be willing to take on more risk to expand faster. But if you’re looking to run a modest side hustle, a more conservative approach might be better.
💡Note: There’s no “correct” level of risk tolerance. It’s about understanding your comfort level and choosing a structure that aligns with your business model. If you’re unsure, consulting with a business adviser or lawyer is always a good idea.
2. Understand tax implications
Different types of businesses qualify for different tax treatment by the IRS, as well as state and local tax authorities.
Business tax statuses include:
Pass-through tax status. Taxes are “passed through” from a company to its shareholders, who pay personal income tax on dividends.
Corporation tax status. Corporations are taxed twice: once on corporate income and again on shareholders’ personal income.
Nonprofit tax status. Nonprofits are exempt from some taxes at federal and state levels so long as they meet eligibility requirements.
Take the stress out of sales tax with Shopify Tax
With Shopify Tax, you can oversee your current sales tax obligations from Shopify admin, collect the right amount at checkout with product and location-specific accuracy, and let Shopify automatically apply rate and regulatory changes whenever they happen.
Explore Shopify Tax
3. Evaluate control and management needs
When picking your business structure, consider how much control you want over decisions and day-to-day operations. Different structures give you different levels of say in running things.
A sole proprietorship is good if you want total control. You’ll call all the shots, but you’ll also be on the hook for everything.
Partnerships split control between you and your partners. Make sure you trust them and agree on who does what.
Corporations have more complex management. There’s a board of directors, officers, and shareholders involved. You might have less direct control, but it can benefit bigger operations.
LLCs offer flexibility. You can run it yourself or set it up like a corporation with managers.
Think about your comfort level with sharing control. Do you work well with others or prefer to be the boss? How hands-on do you want to be in daily business operations? If you plan to grow big, a structure that allows for easier expansion might be smart.
4. Consider funding options
When you’re starting out, one key thing to think about is how you’ll fund your business. How you fund your business will dictate the business structure you choose.
Say you’re launching a new app. If you go the sole proprietorship route, you might be dipping into your savings or asking your family for a loan. It’s simple, but it might limit your options down the road.
On the flip side, forming a corporation could open doors to bigger possibilities. You could end up pitching to venture capitalists or even going public someday. A partnership lets you pool your resources with friends or colleagues.
Take some time to consider how different structures might affect your funding options. And when in doubt, consult a professional business adviser or lawyer on which option is best for your funding plans.
5. Consider future growth and scalability
When picking a business structure, think about where you want your company to be in five or 10 years. Different structures have pros and cons for growing your business:
Sole proprietorship. Easy to start but tough to expand. You’re on your own for funding and decision-making.
Partnership. This lets you team up with others, but growth can get messy as more partners join.
Limited liability company (LLC). Flexible and protects your personal assets. It’s good for small to medium-sized businesses that want room to grow.
Corporation. Best for big growth plans. Getting investors and going public is easier, but it comes with more rules and paperwork.
Think about:
How big do you want to get?
Will you need outside investors?
Do you plan to sell the business someday?
Pick a structure that won’t hold you back as your business takes off. Remember, you can always change your structure later, but getting it right from the start is easier.
6. Set personal and business goals
Ask yourself where you see this business going. Are you hoping to:
Grow it into a major company? If you want to grow beyond yourself, you may want to consider forming an LLC or C corporation.
Keep it as a side hustle? If you want a small, manageable business, you might fare well as a sole proprietor.
Eventually sell it? If you want to sell your company someday, consider staying a sole proprietorship. Since the business is owned by a single individual, there are no complex ownership transfers involved; you simply sell the business assets as the new owner directly.
You’re not locked into your choice forever. As your goals change (and they will), you can always restructure your business. The important thing is to pick a structure that aligns with your current plans and helps you work toward your goals, whether that’s becoming the next soda pop mogul or just earning some extra cash with a small home-based business.
Determining which type of business is right for you
Determining the right structure for your small business is one of the most important decisions you will make as an entrepreneur.
After reflecting on the questions above, consult a business attorney or certified public accountant (CPA). These professionals can give you personalized advice based on your situation and help you navigate any financial or legal implications.
Types of business FAQ
What are the 4 main types of businesses?
The four main types of businesses are sole proprietorship, partnerships, limited liability companies, and corporations.
What are the 10 types of business?
Sole proprietorship
General partnership
Limited partnership
Limited liability partnership (LLP)
C corporation
S corporation
Benefit corporation
Limited liability company (LLC)
Nonprofit
Joint venture
What are business categories?
Business categories are classifications that group similar types of businesses based on their activities or industries. These categories help organize businesses into regulatory, tax, and statistical categories, and include sectors like retail, manufacturing, health care, and technology.
What is the best business structure for a small business?
There is no one-size-fits-all “best” business structure for small businesses, as the ideal choice depends on liability protection, taxation, ownership structure, and growth plans. However, an LLC is generally considered the best structure for small- and medium-sized businesses.
Do I need a lawyer to set up my business?
While it’s not always legally required, consulting with a lawyer when setting up your business is highly recommended—especially for more complex structures like corporations or LLCs.
