Key Takeaways

  • The main forms of business ownership include sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives.
  • Sole proprietorships are the simplest structure but expose the owner to unlimited personal liability.
  • LLCs combine liability protection with management and tax flexibility, but owners must still maintain proper separation of business and personal activities.
  • Corporations offer strong liability protection and access to capital but involve higher costs, more regulations, and potential double taxation for C-corps.
  • Partnerships allow shared decision-making and resources but create personal liability risks unless structured as limited or limited liability partnerships.
  • Cooperatives are owned by members who share profits and decision-making equally.
  • Choosing the right structure depends on factors such as liability, taxation, control, continuity, and growth needs.

The most common corporate forms of business ownership are:

  • Sole proprietorships.
  • Limited liability companies (LLC).
  • Corporations (for-profit or nonprofit).
  • Partnerships.
  • Cooperatives.

When you start your business, choosing a legal structure is one of the first and most important decisions you'll have to make. Your choice will determine:

  • How your business is taxed.
  • How complex your paperwork will be.
  • The liability you will take on personally.
  • Your ability to take out loans to grow your company.

When you are making the decision about how to organize your business, consulting with a professional is wise, but you can and should do a fair amount of research yourself. Business formation is governed by the state law where you organize.

Sole Proprietorships

A sole proprietorship has just one owner. The positive side of this form of business ownership is that it is the simplest, the easiest to set up, and the least expensive to run. Making decisions in a sole proprietorship is very simple and straightforward. This may be the best choice if you are the only owner and you have no need to separate the identity of the business from your personal identity.

The downsides of a sole proprietorship can be significant. The sole proprietor is completely liable personally for all activities of the business. That means he or she is responsible for the debts of the business if the company can't pay, and his or her personal assets are at risk.

The owner is responsible for all the profits, losses, assets, and liabilities of the company, for good or bad. For those reasons, this is probably not the best choice for someone in a high-risk type of business. Sole proprietors are also required to pay self-employment tax on income they realize from the business.

If your business requires significant borrowing, then the sole proprietor form of operation may not be the best choice. If your personal financial history is not very strong or if you are likely to be sued for the activities of the business, then it's wise to choose a different legal structure to protect your personal assets. Sole proprietors may find some protection in a business insurance policy.

Advantages and Disadvantages of Sole Proprietorships

While sole proprietorships are popular for freelancers, consultants, and small-scale retailers, owners should weigh both benefits and drawbacks. Advantages include:

  • Minimal start-up costs and paperwork.
  • Direct control over all decisions.
  • Simplified tax reporting, as profits and losses flow to the owner’s personal tax return.

Disadvantages include:

  • Unlimited personal liability for debts and lawsuits.
  • Limited access to outside funding, as investors and banks prefer more formal structures.
  • Lack of continuity—business often dissolves when the owner retires or dies.

Limited Liability Company

Limited liability companies (LLCs) are somewhere between a corporation and partnership. However, they are not incorporated, so they are not considered corporations. This form offers the business owner some protection for his or her personal assets. This structure also gives the owner some protection from personal liability for the activities of the business.

However, the owners of an LLC should understand that they do not enjoy full immunity from liability. Owners can still be held responsible for deliberate fraud, reckless behavior, illegal actions, and failing to separate business and personal activities.

For most small businesses, the LLC structure is preferable to forming a corporation. The LLC has greater flexibility in handling profits and management decisions, especially if several owners are involved.

Key Features of LLCs

An LLC provides flexibility and protection for owners (called members). Some key features include:

  • Tax treatment options: LLCs can be taxed as sole proprietorships, partnerships, S corporations, or C corporations, depending on elections made with the IRS.
  • Management flexibility: Members may manage the business themselves or appoint managers.
  • Liability protection: Members are generally not personally responsible for company debts or obligations.

However, LLCs may face challenges, such as:

  • Higher formation costs compared to sole proprietorships or general partnerships.
  • Some states imposing annual fees or franchise taxes.
  • Variability in state laws regarding LLC operations, which can complicate multistate business.

Corporation

In a corporation, the owners are called stockholders. They have limited liability for the actions of the company, but they also have limited involvement in the day to day operations. This is one of the most complicated forms of business to run in terms of taxes, record keeping accounting, and general paperwork. Shareholders report the money they earn on their personal income tax returns, which lets them avoid the double taxation that happens with other business forms.

Types of Corporations

Corporations can take different forms, each with unique tax and governance implications:

  • C Corporation: Separate legal entity taxed independently; subject to corporate income tax and potential double taxation (profits taxed at corporate level and again when distributed as dividends).
  • S Corporation: Allows profits and some losses to pass through to shareholders’ personal tax returns, avoiding double taxation. Restrictions apply, such as limits on the number of shareholders.
  • Nonprofit Corporation: Operates to further a social, charitable, or educational mission rather than profit; eligible for tax-exempt status under IRS rules.
  • Professional Corporation (PC): Designed for licensed professionals (e.g., doctors, lawyers) who want liability protection while practicing in their field.

Partnerships

A partnership involves two or more partners who maintain personal liability for the debts of the business. Any partner can be held responsible for the actions of the business, and each partner holds decision-making authority.

One special type of partnership is a limited partnership in which only one partner can make decisions for the company and can be held personally liable. The other partner(s) are investors in the business but don't make day to day decisions.

Another type of partnership is the limited liability partnership, or LLP. This structure is commonly used in professional associations of doctors and lawyers. The LLP structure is not available in every state, and regulations vary widely. If you are considering this structure, you'll want to research your local jurisdiction's requirements carefully. In a partnership, the gains and losses the partners realize pass through to the individual tax return.

Cooperatives

A cooperative (co-op) is a member-owned business structure designed to serve the interests of its members. Key points include:

  • Members pool resources to purchase goods, services, or operate collectively.
  • Profits are distributed among members, often based on use rather than capital contribution.
  • Common in industries like agriculture, utilities, and housing.
  • Decision-making follows democratic principles, typically one-member-one-vote, regardless of investment size.

Cooperatives emphasize community benefit and shared responsibility, though raising outside capital can be more difficult compared to corporations.

Partnership Types and Considerations

Partnerships can be tailored to the needs of the partners:

  • General Partnership: All partners share equally in profits, losses, and liability.
  • Limited Partnership (LP): At least one general partner manages the business and bears unlimited liability, while limited partners invest without direct management authority.
  • Limited Liability Partnership (LLP): Provides liability protection to partners, often used by professional groups like accounting firms or law practices.

Important considerations for partnerships include:

  • Drafting a detailed partnership agreement to clarify roles, profit sharing, and dispute resolution.
  • Understanding that any partner’s actions may bind the business legally.
  • Recognizing that continuity may be affected if a partner withdraws or passes away.

Frequently Asked Questions

  1. What are the main forms of business ownership?
    The most common are sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives.
  2. Which business structure offers the best liability protection?
    Corporations and LLCs generally provide the strongest personal liability protection compared to sole proprietorships or general partnerships.
  3. How are LLCs taxed?
    By default, single-member LLCs are taxed like sole proprietorships and multi-member LLCs like partnerships, but they can elect S-corp or C-corp taxation.
  4. What is the difference between an S corporation and a C corporation?
    C corporations face double taxation, while S corporations pass income through to shareholders’ personal tax returns, avoiding corporate-level tax (with eligibility restrictions).
  5. Why choose a cooperative over other forms of business ownership?
    Cooperatives benefit members collectively by sharing profits and decision-making, making them ideal for community-focused or industry-specific groups.

If you need help with choosing a corporate form of business ownership, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.