Just because your business is small doesn’t mean you shouldn’t worry about forming a legal business entity. Today’s business environment — and society in general — is ultra-litigious, which means it’s also ultra-important that you separate your personal finances from your business finances.
It’s also important to understand the various types of business available to choose from so you can select one that is most suited to your business and its objectives. Fortunately, the Small Business Administration, or SBA, provides sound organized information on just this topic.
As listed by the Small Business Administration, here are the five most common legal structures for your business.
Cooperative. Common for restaurants, health care organizations, agricultural entities, and art firms, cooperative organization are both owned and operated mainly for the those who intend to use the service. In this type of structure, earnings and profits of the cooperative are distributed to members.
Corporation. In a corporation, the shareholders own the business, rather than the corporation itself. However, the corporation is liable for its actions, including its debt. That said, when a corporation offers goes public through an initial public offering (IPO), it typically becomes more attractive to investors and venture capitalists.
Limited Liability Company (LLC). An LLC can be thought of as a hybrid between a corporation and partnership. This type of legal structure shares the limited liability features of a corporation and also the operating flexibility and tax benefits of a partnership.
Partnership. When two or more people share ownership in a business, it is considered a partnership. Each partner contributes to the business in terms of money, skill, and other assets, but also shares in the profits and losses earned by the business. The three common types of partnerships include general partnerships, joint venture partnerships, and limited partnerships.
S Corporation. Created through an IRS tax election, an S corporation assists a company from avoiding double taxation (i.e. corporation and its shareholders).
While this is just a brief overview of the types of ways to incorporate your business, the SBA provides detailed information on each of the most common legal business structures.