The 7 Most Popular Business Types in the US

Existing companies and new entrepreneurs can use different types of business structures to organize their businesses. As a first-time business owner, the sheer selection of choice can look intimidating.

So here’s a refresher for you.

Table of contents

1. The common types of business structures in the US
2. Sole proprietorship
3. Limited liability company (LLC)
4. General partnership
5. Limited partnership
6. Corporation
7. Nonprofit organization
8. Cooperative (Co-op)
9. Conclusion: How to choose a business structure
10. FAQs about business entities

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The common types of business structures in the US

If you want to start a new business or a startup, here are the 7 common types of business structures in the US worth considering:

1. Sole proprietorship
2. Limited liability company (LLC)
3. General partnership (GP)
4. Limited partnership (LP)
5. Corporation (C Corp, B Corp, and S Corps)
6. Nonprofit organization
7. Cooperative (co-op)

Is there the best business structure for your business entity?

No. The choice will depend on a few factors: liability, number of owners, management structure, business goals, taxation, ease of formation, etc. So let’s zoom in on every option available.

1. Sole proprietorship

Sole proprietorships are a business structure owned by one owner. It’s not considered a separate legal entity. Meaning the owner can be personally responsible for the business liabilities.

A sole proprietorship is an optimal choice for business owners looking for a simple way to start a small business since there’s the least paperwork involved.

Pros of a sole proprietorship

• Easy-to-setup
• Simple taxes
• Low operating costs
• Business owners retain control

Cons of a sole proprietorship

• Unlimited personal liability
• Harder to raise business capital
• Personal responsibility for all risks

How do you file taxes as a sole proprietor?

Taxes for a sole proprietorship are reported on the business owner's personal tax returns. In essence, you detail all business income and expenses within your personal declaration on the Schedule C form, attached to your personal returns. Note, sole proprietors may also be responsible for additional federal taxes, such as self-employment taxes.

2. Limited liability company (LLC)

A limited liability company (LLC) is a type of business structure that provides limited liability like corporations while also providing the benefits of a partnership, such as flexibility, tax benefits, and simplicity. LLCs can have one or more business owners called members.

Also, LLCs are registered as separate legal entities by filing articles of incorporation with the local Secretary of State.

Members’ personal assets are protected from the business debts of the LLC. An LLC is a good option for small and growing businesses that want flexibility and protection of personal assets for business debts.

Pros of operating as an LLC

• Versatile business structure, suited for different types of ventures
• No personal liability for business debts
• Straightforward management structure
• Pass-through taxation

Cons of operating as an LLC

• More complex taxation requirements compared to the sole proprietorship
• Member turnover can lead to the dissolution of business

Does an LLC really protect you?

Yes and no.

Overall, an LLC lends protection to your personal assets. But courts may order that LLC members’ personal assets cover the LLC's liabilities in some cases. It’s known as “piercing the corporate veil.” A member may have personal liability if that member’s personal assets and debts aren’t clearly distinct from those of the LLC.

For example, if you’re using the same bank account for personal and business transactions. It’s not common for members to incur personal liability for the LLC’s obligations, but this legal structure will not guarantee complete protection in all instances.

3. General partnership

Partnerships have two or more owners that contribute to the business and share its risks and profits. A general partnership is a solid choice if you want to start a new company with a trusted partner or several.

A general partnership assumes that all members agree to unlimited liability. That means your personal assets are not protected, and a potential plaintiff can go after them. Also, each partner can be persecuted for any company debts or other liabilities.

Overall, this business structure is similar to a sole partnership. But the difference is that you diversify profits and risks among all members.

Pros of a general partnership business structure

• Greater borrowing potential
• Simple formation framework
• Lower tax implications
• More control over operations

Cons of partnership business structure

• Shared liability for debts accumulated by any partner
• Partners’ personal assets are at risk
• Need for strategic planning

What makes a successful business partnership?

For a partnership to be successful, the business owners must have a high level of trust and equal willingness to contribute to the operations. From a legal perspective, some states also require owners to have an operating agreement outlining each partners’ responsibility and input to the business.

4. Limited partnership

A limited partnership (LP) is another structure for registering a jointly-owned business, where you have a general partner overseeing the business operations and limited partner(s) — exercising a lower degree of involvement.

Unlike a general partnership, however, all members, except for the general partner, have limited liability for business debts. The general partner has more management control over the business activities but also has personal liability for business debts.

Pros of limited partnership

• Unlimited number of business shareholders
• Limited liability for some partners
• Flexibility in structure and tax reporting

Cons of limited partnership

• All profits are viewed as personal income
• More complex structure
• Not available in all states

What is the difference between LP and LLP?

Limited Partnership (LP) and Limited Liability Partnership (LLP) are both partnerships and offer the benefits of typical forms of partnerships. Both require filings with the state of formation but aren’t available in every state. The difference is while an LP must have a general partner, who is personally liable for business actions, but with LLPs, all the partners are considered limited partners. LLPs are a good business structure where the owners do not want to be held liable for the debts or liabilities of other owners. Usually, LLPs are only available to professional groups.

5. Corporation

A corporation is a business and legal entity independent of its owners. For-profit corporations also extend limited liability to their members, called stock or shareholders. As a shareholder, you can receive profit from the business in dividends or stock options. Furthermore, you can’t be held liable for any of the company’s liabilities.

Corporation (Inc) works best for large and established businesses that plan to have multiple owners with no or limited participation in business operations.

The US law recognizes three types of corporations for tax purposes:

C Corporation

The most common type of corporation is a C corporation (C-corp). It’s taxed as a separate entity and owned by multiple shareholders. This type of entity allows for an unlimited number of shareholders or owners. This fact makes it a popular structure for larger companies listed on the stock exchange.

C Corps are the default tax classification for a business that incorporates as an Inc. Since it’s taxed as a separate entity, taxes must be paid at both the corporate level and on the shareholders’ income. The practice is called double taxation.

S Corporation

S Corporations (or S corps) need to abide by state and federal laws. Per IRS US laws, S corps should: be a domestic corporation; have shareholders allowed by the IRS; have only one class of stock; and not be otherwise ineligible for the IRS.

B Corporation

B Corps are corporations that operate for a profit to make a positive impact on society. The Certified B Corporation describes this type of business structure as:

To qualify as a B Corp, business owners must pass certification by B Lab, an independent nonprofit organization. Afterward, you’ll be recognized as this structure in every state.

Pros of corporations

• Personal liability protection
• Greater access to capital
• Allows for multiple business owners

Cons of corporations

• More complex incorporation process
• Possible double taxation for business owners
• Less control for business owners
• Higher operating costs

Can anyone start a corporation?

Anyone can start a corporation – even if they intend to have a single owner. But the formation process for a single owner is more complex and probably not that cost-effective. Other than that, if you’re considered of legal age in your state and meet all other official requirements for company formation, you should be eligible to start a corporation.

6. Nonprofit organization

Nonprofit organizations operate to aid a charitable, humanitarian, political, or other nonprofit cause. Because of this commitment to serving the communities, rather than pursuing profits, they are granted a tax exemption by the IRS.

The exempt nonprofits types include:

• Qualifying charitable organizations
• Churches and religious organizations
• Private foundations
• Political organizations

Tax exemption isn’t granted immediately upon the formation. You’ll need to separately apply for tax-exempt status with the IRS if you meet all the requirements.

There are also state requirements that differ for some nonprofit organizations. For those that do, the National Council of Nonprofits provides tools and resources for business owners.

Can I pay myself a salary in a nonprofit?

Yes. You can pay yourself a salary in a nonprofit as a member/owner. In a nonprofit, the proceeds received are reinvested into the business organization to carry on its mission. To accomplish this, it will usually require paying a reasonable salary to the people that work for it. While some nonprofits may have volunteers, the full-time workers receive salaries.

7. Cooperative (Co-op)

A cooperative is a form of a business structure formed by multiple business owners to pursue shared economic, social, and cultural goals. A co-op may be an incorporated separate legal entity or operated as a sole proprietorship, partnership, corporation.

What are the benefits of a cooperative?

The benefits of a cooperative include:

• Perpetual existence
• Less taxation
• More funding opportunities (which makes this especially good for a small business)

Conclusion: How to choose a business structure

To select the optimal business structure for your company, take into account the following factors:

• Incorporation ease and cost
• Ownership
• Taxes
• Liability

As a new business owner, you may be concerned about liability and taxes – as you should! With these different business entities, the liability and taxes expand.

All of this is talked about in the other sections below.

FAQs about business entities

Here are some of the most common questions about business types and doing business in the US.