Legal Forms of Business: How to Choose the Right Business Structure

Your business structure might also affect how investors perceive your business. For example, a sole proprietorship or partnership may be perceived as riskier than a corporation because the liability for the business falls on the individual owner(s) rather than the entity itself.

They also might prefer to invest in companies where they can get part ownership and have more control over how the business is run.

There will be upsides and downsides to each business structure, but keep in mind how you want to raise money when choosing a legal form of business.

Registration

Something else to consider when looking over the different legal forms of business is the amount of paperwork and legal requirements you’ll have.

A sole proprietorship and partnership can usually be established quickly and with little legal paperwork. Depending on the laws of your current state, you’ll typically just need a business license and to register your business name.

Registering a corporation or LLC will require more legal paperwork and filing with the state. You’ll need to include information about the members or shareholders, the purpose of the business, management structure, as well as getting a business license or permit.

Depending on the business you’re starting, it might be worth consulting an attorney to help you decide which business structure would be best for you.

Hierarchy

Something else that is affected by your business structure is the hierarchy of your business. This refers to the legal relationship between owners, managers, and employees.

In a sole proprietorship, the owner is responsible for all aspects of the business and there is no formal hierarchy. However, as the business grows, the owner may need to hire employees and delegate tasks.

In a partnership, the partners share ownership of the business and may have different roles and responsibilities. The hierarchy of the partnership may depend on the partners’ experience and expertise, with one partner taking a more leadership role.

In an LLC, the owners (called members) may have different levels of involvement in the business but typically have equal voting rights. The management structure of an LLC can be flexible, with members able to make decisions collectively or delegate decision-making to one or more managers.

In a corporation, the owners (called shareholders) elect a board of directors to oversee the management of the business. The board of directors then appoints officers (such as a CEO, CFO, and COO) to manage the day-to-day operations.

The hierarchy of a corporation can be quite formal, with clear lines of authority and decision-making power.

When choosing the structure of your business, keep in your mind your specific needs and goals, including how you want the hierarchy set up and who will have decision-making power.

Paperwork

Another area of your business that will be strongly impacted by the business structure you choose is the amount of paperwork that will need to be done. Different legal forms of business have different requirements that you’ll need to fulfill for legal compliance.

In a sole proprietorship, the paperwork required to start and operate the business is relatively minimal. You may need to obtain a business license or permit and register your business name, but you won’t have too much ongoing paperwork besides what’s required for tax purposes.

In a partnership, the partners will also need to create a partnership agreement, which outlines the roles and responsibilities of each partner and the terms of the partnership. Each partner will also need to keep track of their share of the partnership income and expenses for tax purposes.

In an LLC and corporation, the amount of paperwork starts to go up significantly. For an LLC, the members will need to file articles of organization with their state government and create an operating agreement. This is in addition to all the other paperwork that partnerships and sole proprietors need to do.

A corporation will need to file all the same paperwork as the LLC, as well as additional tax forms such as Form 1120 for C corporations or Form 1120S for S corporations.

This, by no means, should play a big factor in which business structure you choose, but it’s important to understand the extra steps you might need to take moving forward.

Liability

One of the key areas of your business that is affected by the business structure you choose is liability. Liability refers to legal responsibility for any debts and legal action the business may incur.

In a sole proprietorship, you as the owner are personally liable for the debts of your business. That means that if someone sues your business or your business can’t pay its debt, then you as an individual will be responsible for paying it back.

In a partnership, the partners are jointly and personally liable for the debts of the business. That means that each partner will be responsible for their share of the debt if the business can’t pay it back.

In an LLC and corporation, however, the members or shareholders are not liable for any legal action or debt taken on by the business. This is why LLCs and corporations are often referred to as “limited liability” entities. This means that if the business goes bankrupt or is sued, then its members and shareholders won’t be held responsible for any legal action or debt incurred by the business.

Taxes

Lastly, it’s important to consider the tax implications when deciding on the legal form of your business. Different legal forms of business are taxed differently and you’ll want to choose the one that best suits your needs.

A sole proprietorship or partnership is taxed as an individual. That means that the business profits or losses are reported on your personal tax return.

An LLC can choose whether to be treated like a partnership and report income and losses on its members’ personal tax returns, or it can elect corporate taxation, in which case it will need to file a corporate tax return.

A corporation will need to file a corporate tax return and pay taxes on all profits for the year. The profits of the corporation can then be distributed to shareholders as dividends, which are also subject to taxation.

Sole Proprietorship

Now let’s go into a little more detail about sole proprietors. A sole proprietorship is a type of business structure where a single individual owns and operates the business.

The owner of the business is solely responsible for all aspects of the business, including its debts, profits, and losses.

In a sole proprietorship, there is no legal distinction between the owner and the business. This means that the owner has unlimited liability for the business’s debts and obligations.

They are completely responsible for any financial debts or any legal action taken against the business. The owner is also responsible for paying all taxes associated with the business’s profits.

Sole proprietorships are relatively easy to set up and operate since there is no need to file any specific paperwork to start the business. However, depending on the nature of the business, the owner may need to obtain the necessary licenses and permits to operate legally.

Overall, a sole proprietorship can be an excellent choice for individuals who want to start and run a small business on their own, without the need for any additional employees or partners.

Examples

Here are some examples of businesses that often operate as sole proprietors:

• Freelancers and consultants: Many professionals, such as writers, graphic designers, and accountants, choose to operate as sole proprietors.
• Small retail stores: Many small retail businesses, such as clothing stores, gift shops, and antique stores, are operated as sole proprietorships.
• Restaurants and cafes: Many small restaurants and cafes are operated as sole proprietorships, with the owner serving as the head chef and manager.
• Personal service providers: Many personal service providers, such as hairdressers, nail technicians, and massage therapists, operate as sole proprietors.
• Home-based businesses: Many businesses that are run from home, such as online stores, tutoring services, and virtual assistants, are operated as sole proprietorships.

Advantages

Like all legal forms of business, there are advantages and disadvantages to running a sole proprietorship. Here are some of the upsides:

• Ease of Formation: Sole proprietorships are relatively easy to set up and manage. They do not require any formal registration, and the owner can start operating the business immediately.
• Control: As the sole owner, you have complete control over all business decisions. This includes the products or services offered, the pricing strategy, and the marketing approach.
• Flexibility: Sole proprietorships offer a great deal of flexibility in terms of management and operations. You can make quick decisions and changes without having to consult with other owners or board members.
• Profit Retention: Sole proprietors are entitled to keep all profits generated by the business. They do not have to share profits with partners or investors.
• Tax Benefits: Sole proprietors can deduct business expenses from their personal income taxes, which can significantly reduce their tax liability.
• Personal Liability Protection: Although sole proprietors are personally responsible for the debts and liabilities of their business, they have the option to purchase liability insurance to protect their personal assets.

Disadvantages

There are also some downsides to running a sole proprietorship. Here are some of the disadvantages:

• Unlimited Personal Liability: As a sole proprietor, you are personally liable for all debts and obligations of the business. This means that if the business is sued or cannot pay its debts, your personal assets like your home or your finances may be at risk.
• Limited Access to Capital: Sole proprietors often have limited access to funding sources, such as loans or investors. This can make it difficult to grow or expand the business.
• Limited Expertise: As a sole proprietor, you may have limited expertise or resources to manage all aspects of the business, such as accounting, legal issues, and marketing.
• Lack of Continuity: Sole proprietorships are tied to the owner. If the owner dies or becomes incapacitated, the business may cease to exist.
• Difficulty in Selling the Business: It can be challenging to sell a sole proprietorship since the business is tied to the owner’s identity and expertise.
• Difficulty in Attracting Talented Employees: Small businesses may find it difficult to attract and retain talented employees. They may prefer to work for larger organizations that offer better benefits and job security.

Partnership

Now, let’s explore partnerships. A partnership is an agreement between two or more people to run a business as co-owners. Each partner contributes money, labor, or skills to the venture and shares in the profits and losses of the business.

Partnerships can be formed as a general partnership or a limited partnership. In a general partnership, all partners share equal responsibility for the business’s management and liabilities.

In a limited partnership, there are both general partners who manage the business and limited partners who only contribute capital and have limited liability.

Partnerships are a popular form of business structure for small and medium-sized businesses. They allow for shared resources and expertise. However, partnerships also require clear communication and a strong partnership agreement. This ensures that all partners are on the same page and can work together effectively.

Example

Many businesses start out as partnerships. For example, a family-run business may be started as a partnership between two siblings who both contribute their skills and expertise to the business.

Or sometimes, two friends or colleagues start a business together to combine their skill sets and resources.

Here are some examples of big companies that started off as partnerships:

• Google: Larry Page and Sergey Brin founded Google as a partnership in 1998. They shared ownership and management of the company until it became a publicly traded corporation in 2004.
• Ben & Jerry’s: Ben Cohen and Jerry Greenfield started their ice cream company as a partnership in 1978. They shared ownership and management of the company until it was sold to Unilever in 2000.
• Goldman Sachs: Marcus Goldman and Samuel Sachs founded Goldman Sachs as a partnership in 1869. The company remained a partnership until it became a publicly traded corporation in 1999.
• Warby Parker: Neil Blumenthal, Dave Gilboa, Andrew Hunt, and Jeffrey Raider founded Warby Parker as a partnership in 2010. They shared ownership and management of the company until it went public in 2021.
• Dropbox: Drew Houston and Arash Ferdowsi started Dropbox as a partnership in 2007. They shared ownership and management of the company until it became a publicly traded corporation in 2018.

Advantages

A partnership offers several advantages for small and medium-sized businesses. Here are some of the benefits of a partnership:

• Shared resources and expertise: Partnerships allow for the pooling of resources, including capital, skills, and knowledge. This can result in a more efficient and effective business operation.
• Shared risks and liabilities: In a partnership, each partner shares the risks and liabilities of the business. This can help to reduce the financial burden on any one partner.
• Flexibility in management: Partnerships can be managed by all partners equally or by a designated managing partner. This allows for flexibility in decision-making and can result in a more responsive and agile business.
• Tax advantages: Partnerships are not taxed as separate entities, but instead, profits and losses are passed through to the partners who report them on their individual tax returns. This can result in tax savings for the partners.
• Easy to form: Partnerships are relatively easy to form and require less paperwork and legal formalities compared to other business structures.
• Potential for increased profitability: Partnerships often have a larger customer base and more resources compared to sole proprietorships. This can lead to increased profits for the business.

Disadvantages

Like all legal forms of business, partnerships have their disadvantages too. Here are some downsides to running your business as a partnership:

• Unlimited liability: In a general partnership, each partner has unlimited personal liability for the business’s debts and obligations. This means that if the business cannot pay its debts, creditors may come after the partners’ personal assets to satisfy the debt.
• Shared decision-making: Partnerships require shared decision-making, which can sometimes result in disagreements and conflicts among partners. These conflicts can lead to delays in decision-making and can impact the overall performance of the business.
• Shared profits: While partnerships allow for shared profits, they also require that profits be split among partners. This can result in lower profits for each partner compared to other business structures.
• Limited life: Partnerships have a limited life span and can be dissolved if a partner withdraws from the business, dies, or becomes bankrupt. This can result in disruption and uncertainty for the remaining partners.
• Difficulty in raising capital: Partnerships may have difficulty in raising capital compared to corporations, which can issue stock or borrow money more easily.
• Potential for disputes: Partnerships may be subject to disputes among partners related to management, financial arrangements, or other issues. These disputes can be time-consuming, costly, and may lead to the dissolution of the partnership.

These disadvantages make partnerships a less attractive option for some businesses, particularly those with high liability risks or a need for significant capital investment.

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Limited Liability Company (LLC)

Another legal form of business to consider when starting a new business is a limited liability company, also known as an LLC. A limited liability company is a business structure that combines the liability protection of a corporation with the tax benefits of a partnership or sole proprietorship.

The company is treated as a separate legal entity, and the owners (also called members) are typically not personally responsible for the company’s debts or obligations. This means that if the company goes bankrupt or is sued, the members’ personal assets are generally protected.

LLCs are typically taxed as pass-through entities, which means that the profits and losses of the company are passed through to the individual members, who report them on their personal tax returns. This allows for the tax benefits of a partnership or sole proprietorship, without the personal liability risk.

LLCs are a popular choice for small businesses, as they offer flexibility in management and ownership structure, and can be formed with relatively few formalities.

Example

There are many popular businesses that are structured as LLCs. Here are a few examples:

• Anheuser-Busch: The world-famous beer company is structured as an LLC and owned by the Belgian-Brazilian multinational AB InBev.
• Blockbuster: The iconic video rental chain was structured as an LLC and owned by Viacom.
• Westinghouse Electric Company: The engineering and nuclear energy company is owned by Toshiba and structured as an LLC.
• Hertz: The car rental company is structured as an LLC and owned by the Hertz Global Holdings, Inc.
• Sony: The electronics and entertainment giant is owned by a Japanese holding company, and structured as an LLC
• IBM: IBM Credit LLC is a technology and consulting company owned by IBM Corporation, and structured as an LLC.

Advantages

There are several advantages to forming a Limited Liability Company (LLC), including:

• Limited Liability Protection: One of the most significant advantages of forming an LLC is that it provides personal liability protection to its owners (also known as “members”). This means that the members’ personal assets are protected from business liabilities and debts.
• Pass-through Taxation: LLCs are typically taxed as “pass-through” entities, meaning that the profits and losses of the company are passed through to the individual members, who report them on their personal tax returns. This can result in a lower overall tax burden for the company and its members.
• Flexibility in Management and Ownership: LLCs offer flexibility in how the business is managed and owned. Members can choose to manage the company themselves or hire outside managers, and ownership can be divided among multiple members or held by a single member.
• Fewer Formalities: Compared to corporations, LLCs have fewer formalities and are generally easier and less expensive to set up and maintain. For example, there is no need for regular shareholder meetings or the issuance of stock certificates.
• Credibility: Forming an LLC can add credibility to a business and make it appear more legitimate to customers, vendors, and lenders.
• Protection of Business Name: By registering as an LLC, the business name is protected within the state where it is registered, and other businesses cannot use the same name in that state.

Overall, the advantages of forming an LLC can make it an attractive option for small businesses and entrepreneurs. You get personal liability protection and tax flexibility, while maintaining a degree of control over the management and ownership of your business.

Disadvantages

Like all legal forms of business, there are some downsides to establishing an LLC. Here are some of the disadvantages of this business structure:

• Cost: While LLCs are generally less expensive to set up and maintain than corporations, there are still costs associated with forming and operating an LLC, such as filing fees, state taxes, and ongoing maintenance fees.
• Self-Employment Taxes: Although LLCs are taxed as pass-through entities, the members are still subject to self-employment taxes on their share of the company’s profits.
• Limited Life: Depending on the state, an LLC may have a limited life, meaning that it will dissolve upon the death or departure of a member unless the operating agreement specifies otherwise.
• State-specific Regulations: LLCs are regulated by state law, and the specific regulations and requirements can vary from state to state. This can make it more complex to form and operate an LLC, particularly if the company operates in multiple states.
• Capital Raising: Compared to corporations, LLCs may have more limited options for raising capital, such as issuing stock or taking on investors.

Overall, the disadvantages of forming an LLC are relatively minor and may not apply to all businesses. However, they are worth considering before deciding to form an LLC.

Corporation

The next legal form of business we’ll cover is a corporation. This is what many people think of when they think of big businesses and companies.

A corporation is a type of business entity that is separate and distinct from its owners. It is created by individuals or groups of people who pool their resources together to form a legal entity that can own property, enter into contracts, and conduct business activities.

The owners of a corporation are called shareholders, and they elect a board of directors to oversee the corporation’s management and decision-making. The board of directors then hires officers to manage the day-to-day operations of the corporation.

The corporation’s profits are typically distributed to shareholders in the form of dividends.

Example

Odds are pretty good you’re familiar with several businesses that operate as corporations. The majority of the brand names you see at the grocery store are corporations.

Here are just a few of the more popular ones:

• Apple Inc.: Apple is one of the largest and most successful corporations in the world, known for its consumer electronics products, such as iPhones, iPads, and Mac computers.
• Walmart Inc.: Walmart is a retail corporation that operates a chain of discount department stores and grocery stores in many countries around the world.
• Coca-Cola Company: Coca-Cola is a multinational corporation that produces and sells a wide range of non-alcoholic beverages, including the popular Coca-Cola soft drink.
• Microsoft Corporation: Microsoft is a technology corporation that develops and sells computer software, hardware, and consumer electronics products.
• Amazon.com, Inc.: Amazon is a technology and retail corporation that operates an online marketplace and provides cloud computing services.
• Procter & Gamble Co.: Procter & Gamble is a consumer goods corporation that produces and sells a wide range of household and personal care products, including Tide detergent, Crest toothpaste, and Pampers diapers.

Within the legal structure of a corporation, there are different types including a C corporation, an S corporation, and a B corporation.

C Corp

A C corporation, also known as a “C corp”, fits the general description of a corporation. The owners are typically shareholders who elect a board of directors to oversee the management and decision-making of the business.

The business is also treated as a legal entity separate from its owners and can own property, enter into contracts, and conduct business in its own name.

One of the main characteristics of a C corporation is that it is taxed as a separate entity from its owners. This means that the corporation pays taxes on its profits at the corporate tax rate, and any dividends distributed to shareholders are taxed again as personal income.

This is known as double taxation, which is a key consideration when deciding whether to form a C corporation.

C corporations are often used by businesses that plan to grow and raise capital through investment, as they can issue multiple classes of stock and can have an unlimited number of shareholders. Additionally, C corporations offer limited liability protection to their shareholders, meaning that their personal assets are generally protected from the corporation’s debts and legal obligations.

Advantages

C corps offer many advantages over other business structures. Here are a few:

• Limited liability: One of the most significant advantages of a C corp is limited liability protection. This means that the owners or shareholders of the corporation are not personally liable for the debts, obligations, or lawsuits of the business. Their liability is limited to the amount of their investment in the company.
• Perpetual existence: A C corp is a separate legal entity that can exist indefinitely, even if the owners or shareholders die or leave the company. This means that the business can continue to operate and thrive even after the departure of its founders or key personnel.
• Access to capital: C corps have more opportunities to raise capital than other business structures. They can issue stocks and bonds to raise funds, which can be used to expand the business or invest in new ventures.
• Tax advantages: C corps enjoy several tax benefits, such as the ability to deduct salaries, benefits, and other expenses from their taxable income. Additionally, they can carry forward or backward losses to offset future or past taxable income.
• Professional image: C corps are often perceived as more professional and credible than other business structures, which can help attract investors, customers, and employees.

Disadvantages

While C corporations have many advantages, they also come with some disadvantages that you should carefully consider before choosing this business structure. Here are some of the disadvantages of a C corp:

• Double taxation: C corps are subject to double taxation, which means that they are taxed on their profits at both the corporate and individual levels. This can result in higher taxes for the corporation and its shareholders.
• Complexity and compliance costs: C corps are subject to more complex legal and regulatory requirements than other business structures. They are required to hold annual shareholder meetings, maintain detailed financial records, and file corporate tax returns. This can result in higher compliance costs and administrative burdens.
• Limited ownership flexibility: C corps have strict rules about who can own shares in the company. They cannot have more than 100 shareholders and cannot issue different classes of stock, which limits the flexibility of ownership and capital structure.
• Less privacy: C corps are required to file financial statements and other documents with the government, which can reduce the privacy of the business and its owners.
• Lack of personal control: C corps are managed by a board of directors and officers, which means that individual shareholders have less control over the day-to-day operations of the business.

S Corp

Another type of corporation is the S corp. An S corporation, or S corp, is a type of business entity that is designed to provide the benefits of a corporation while avoiding the double taxation that is associated with a C corporation.

An S corp is a pass-through entity, which means that the profits and losses of the company are passed through to the shareholders, who report them on their individual tax returns.

To qualify as an S corp, a company must meet certain requirements, including:

1. Be a domestic corporation.
2. Have only allowable shareholders, which include individuals, certain trusts, and estates, and are limited to 100 or fewer.
3. Have only one class of stock.
4. Not have more than 25% of its income from passive sources.

Advantages

Here are some of the advantages of establishing an S corp:

• Pass-through taxation: The profits and losses of the company are passed through to the shareholders, who report them on their individual tax returns. This can result in lower taxes for the company and its shareholders.
• Limited liability protection: Like a C corp, an S corp provides limited liability protection for its shareholders.
• More flexibility: S corps have more flexibility than C corps in terms of ownership and capital structure. They can issue different classes of stock and have more options for ownership and financing.
• Professional image: Like a C corp, an S corp is a formal business entity that can help establish a professional image and attract investors, customers, and employees.

Disadvantages

S corps also have some disadvantages, including:

• Restrictions on ownership: S corps have restrictions on the types of shareholders that are allowed, which can limit the flexibility of ownership and financing options.
• Limited life span: An S corp may have a limited life span, as it may lose its status as an S corp if it fails to meet the eligibility requirements.
• Compliance costs: S corps are subject to certain compliance requirements, such as holding annual meetings and filing certain tax forms, which can result in higher compliance costs.

B Corp

Another popular type of corporation is a B corp. A B Corp, short for “Benefit Corporation,” is a type of business entity that is legally required to pursue social and environmental goals in addition to making a profit.

B Corps are designed to meet higher standards of social and environmental performance, accountability, and transparency than traditional corporations.

B Corps are certified by the non-profit organization B Lab, which evaluates the company’s social and environmental performance, as well as its governance structure, and awards the certification based on a rigorous set of standards.

Some of the key features of a B Corp include:

• Social and environmental purpose: B Corps are required to pursue a social or environmental mission that is built into their corporate bylaws, in addition to making a profit.
• Accountability: B Corps are required to be transparent about their social and environmental impact, and to regularly report on their progress toward their mission.
• Legal protection: B Corps are legally required to consider the impact of their decisions on all stakeholders, including their employees, customers, suppliers, community, and the environment.

Advantages

Some of the advantages of a B Corp include:

• Brand differentiation: B Corps are recognized for their commitment to social and environmental impact. This can help differentiate them from competitors and attract socially conscious customers and employees.
• Access to funding: B Corps can access funding from impact investors and other sources of capital that prioritize social and environmental impact.
• Employee engagement: B Corps are often able to attract and retain employees who are motivated by the company’s social and environmental mission. These employees are often more enthusiastic and dedicated due to their commitment to the mission.

Disadvantages

B Corps also have some disadvantages, including:

• Certification costs: B Corps are required to pay for certification and ongoing assessment fees. This can be a significant expense for small businesses.
• Complexity: B Corps have more complex legal and regulatory requirements than traditional corporations. This can result in higher compliance costs and administrative burdens.
• Limited liability protection: B Corps do not offer the same level of limited liability protection as traditional corporations. This can increase the personal liability of the company’s owners and managers.

Nonprofit Organization

Another popular type of business structure is a nonprofit organization. A nonprofit organization is a type of business entity that is formed for purposes other than making a profit.

Nonprofits are typically organized around a specific social, educational, or charitable mission and are exempt from paying taxes on their income. They can operate in many different areas, such as education, healthcare, the arts, the environment, and social justice.

Example

There are many different types of nonprofit organizations, each with its own specific mission and focus. Here are some examples of nonprofits:

• Charities: Charities are nonprofits that provide direct assistance to individuals or communities in need, such as the American Red Cross, Habitat for Humanity, and Feeding America.
• Educational institutions: Nonprofit educational institutions include colleges, universities, and private schools such as Harvard University, Stanford University, and the National Association for the Education of Young Children.
• Religious organizations: Nonprofit religious organizations include churches, mosques, synagogues, and other faith-based organizations such as Catholic Charities and the Islamic Society of North America.
• Health organizations: Nonprofit health organizations include hospitals, clinics, and research centers such as the American Cancer Society and the Mayo Clinic.
• Arts organizations: Nonprofit arts organizations include museums, theaters, symphonies, and dance companies such as the Museum of Modern Art and the New York Philharmonic.
• Advocacy groups: Nonprofit advocacy groups work to promote social or political change on specific issues such as human rights, animal welfare, and environmental protection. Examples include Amnesty International and the Sierra Club.
• Social service organizations: Nonprofit social service organizations provide a range of services to individuals and communities in need, such as food banks, homeless shelters, and youth development programs such as the Boys and Girls Clubs of America.

Advantages

Establishing a nonprofit organization can provide a number of advantages for businesses, including:

• Tax benefits: Nonprofits are exempt from paying federal and state income taxes, as well as certain other taxes. This can result in significant cost savings for the organization.
• Donations: Nonprofits can receive tax-deductible donations from individuals and corporations. This can help to fund the organization’s operations and programs.
• Limited liability protection: Like for-profit businesses, nonprofits offer limited liability protection to their directors, officers, and members. This can help to shield them from personal liability in the event of a lawsuit or other legal action.
• Grant funding: Nonprofits are eligible to apply for grants from government agencies, private foundations, and other organizations, which can provide additional funding.
• Public trust: Nonprofits are often viewed as being more socially responsible and community-oriented than for-profit businesses. This can enhance their reputation and increase public trust.
• Mission-driven: Nonprofits are typically organized around a specific social or environmental mission. This can provide a sense of purpose and motivation for employees and volunteers.
• Collaboration: Nonprofits often work collaboratively with other organizations and community stakeholders. This can lead to greater networking opportunities and partnerships.

Disadvantages

Establishing a nonprofit organization can also come with several disadvantages and challenges for businesses, including:

• Limited profit potential: Nonprofits are not intended to generate a profit for owners or shareholders, which can limit the potential for financial returns and growth.
• Limited control: Nonprofits are typically governed by a board of directors or trustees, and decisions may be subject to regulatory approval. This can limit the control that founders or owners have over the organization.
• Complex regulatory requirements: Nonprofits are subject to complex legal and regulatory requirements, including reporting and compliance obligations. This can be time-consuming and costly to manage.
• Restricted activities: Nonprofits are subject to restrictions on their activities and may be prohibited from engaging in certain types of activities or transactions.
• Limited funding sources: Nonprofits rely on donations, grants, and other funding sources. These can be unpredictable and limited in scope. Plus, you’re often competing with other organizations for funding and resources.
• Public scrutiny: Nonprofits are subject to public scrutiny and must maintain transparency in their operations and finances, which can be challenging for some organizations.

How to Choose the Right Business Structure

Now that we’ve covered the different legal forms of business, let’s go over how to find the right one for you. I hope at this point that it’s pretty clear more than one factor goes into choosing the right business structure.

Here are some things you need to consider:

Flexibility

When choosing a business structure, you’ll definitely want to take flexibility into account. How adaptable will your business need to be?

Different business structures have different levels of flexibility, and the choice of structure can impact your ability to adapt to changes in the market, grow, and respond to opportunities and challenges.

For example, a sole proprietorship is a simple and flexible business structure that is easy to set up and operate, but it provides little legal protection and has limited potential for growth. In contrast, a corporation provides greater legal protection and can raise capital more easily, but it is more complex to set up and operate. It’s also less flexible in terms of decision-making.

Complexity

Something else to consider when choosing a business structure is complexity. Is a complex business structure going to add or take away from your business?

Depending on the business structure you choose it can impact the ease of operation, administrative burden, and legal obligations for the business. Most small businesses opt for a sole proprietorship, partnership, or LLC just to keep things simple in the early stages.

They’re less complex to set up and operate while still leaving room for growth in the future.

Liability

Liability is another important factor to consider when choosing a business structure. Each legal structure carries different levels of legal and financial liability for owners and other stakeholders. It’s important to be aware of these implications before making a decision.

For example, a sole proprietorship or partnership provides no legal protection against personal liability, while a corporation limits the liability of its shareholders. An LLC offers legal protection, but the degree of legal protection varies from state to state.

Deciding on whether or not you need a business structure that offers more legal protection will depend on how much personal liability you’re willing to assume and the nature of your business. If your business involves high-risk activities or the potential for lawsuits, you may want to consider a structure with greater liability protection, such as an LLC or a corporation.

Taxes

You’ll also want to consider the tax implications of different legal structures. Different legal forms of business have different tax requirements and liabilities, so it’s important to understand how each structure will affect your overall tax burden.

For example, a sole proprietorship and partnership are subject to self-employment taxes while a corporation has more complex tax obligations. Depending on the legal structure you choose, there may also be additional taxes to consider such as payroll taxes.

Control

Something else you’ll want to keep in mind when choosing a business structure is who has control over major decisions in the business. In a sole proprietorship or partnership, the owners have full control.

In a corporation, the shareholders and board of directors have legal authority over major decisions. And in an LLC, the members can agree on who will have legal authority over different matters through their operating agreement.

Deciding who has control over certain aspects of the business can have legal and financial implications, so it’s important to take this into consideration when choosing a legal structure.

Capital investment

Another factor you’ll want to consider is getting funding for your business. If you’re looking to raise capital from outside investors, a business structure that offers legal protection and more formalized decision-making may be more appealing.

For example, corporations are usually favored by venture capitalists because of the legal protections they offer both the company and its shareholders. And LLCs offer legal protection while still keeping decision-making relatively flexible.

Licenses, permits, and regulations

Finally, you’ll also want to consider the legal requirements for each legal structure. Depending on the legal form of your business and where you live, there may be additional licenses, permits, and other regulations you’ll have to deal with.

For example, some states require certain types of businesses to have a state license or certificate in order to operate legally. Different legal forms also have different filing requirements when it comes to taxes, so make sure you understand all the legal requirements before making a final decision.

What Legal Form of Business is Best?

Now that we’ve covered all the different legal forms of business, you might be wondering which is the best for you. Ultimately, the business structure that is best for your needs will depend on a number of factors, such as the size and scope of your business, the amount of capital you have to invest, and your legal and financial goals.

For example, if you are looking to generate profits and have limited liability protection, then a corporation or LLC may be the best option. On the other hand, if you are running a small business or nonprofit and need to keep costs low, then a sole proprietorship or partnership may be more suitable.

It’s worth talking to an attorney in your area to help you determine which legal form of business is right for you. Check out our legal resources page to find legal professionals in your area who can help.

FAQs About Legal Forms of Business

Still have some questions about legal forms of business and choosing the right business structure? Here are some frequently asked questions:

What are the 4 types of LLC?

The four main types of LLCs are single-member LLCs, multiple-member LLCs, professional LLCs, and series LLCs.

What is the legal definition of a corporation?

A corporation is a legal entity created by legal documents filed with the state or country in which it operates. A corporation has legal authority to enter into contracts, own assets, and pay taxes.

What is an S Corp vs LLC?

An S corporation is a legal form of business that provides limited liability protection and taxation benefits, while an LLC also offers limited liability protection but with fewer formalities.

Unlike an S corp, LLCs are not subject to the same double taxation as other entities, nor do they have additional filing requirements or restrictions regarding ownership shares. As such, LLCs may offer more flexibility and fewer restrictions than an S corp.

Which legal form of business organization is most common?

The most common legal form of business organization is the sole proprietorship. Sole proprietorships are easy to set up and require minimal paperwork, making them a popular choice for those just getting started in business.

With that said, LLCs are becoming increasingly popular due to their flexibility and legal protections, so it’s worth considering this legal structure if you are unsure which to choose.

What does “legal form of business” mean?

Legal form of business refers to the legal structure that a business is set up under. There are several legal forms of business, including sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives.

What are the best legal forms of business structure for multiple people to be involved in?

The best legal forms of business structure for multiple people to be involved in are either partnerships or limited liability companies (LLCs). Partnerships offer ownership in the business for all partners, and LLCs provide flexibility and legal protections for members. It’s worth talking to an attorney in your area to determine which legal form is best suited for your needs.

Conclusion to Legal Forms of Business

I hope this guide has helped you better understand the legal forms of business available to you. Choosing the right business structure is a big step in building your business, and it’s worth taking the time to learn about your options so you can make an informed choice.

Remember, legal forms of business offer different levels of legal protection and tax benefits, so it’s important that you consult with a legal professional in your area before making a final decision.

For more resources about how to start your business and set it up for success, check out our free resources.

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