Almost every company in the U.S. started as a small business. Logically, many small businesses have to think about their organization and what kind of entity they want to be. Understanding the various types of corporations is important for any company.
Before you start thinking about your company’s structure, it’s important that you first understand how it affects your operations. This will allow you to make an informed decision regarding the type of entity that will best serve your business. Once you determine what type of corporation you want your business to operate as, you can learn how to file an LLC for free or any other type of corporation.
How Different Corporation Types Affect Your Business
Where the law is concerned, your business is considered a legal entity. Various legal implications come with having different types of corporations or business structures. Some of these include tax-exempt statuses, personal liability protections, and higher levels of income tax.
As a startup, your company might be a general partnership or sole proprietorship. However, as your company grows and your financial needs change, you might need to change the type of entity that you’re registered as. There are various types of corporations and entities out there.
Types of Business Structures and Corporations
1. S Corporations
An S corporation is a type of business entity that carries out most of its operations through its shareholders. It’s able to pass its financials through to its shareholders, which allows it to be taxed like a partnership. It also benefits from various perks and tax deductions.
This type of corporation is responsible for its income and losses. Unlike a C corporation, which is typically taxed both on its income and gains, an S corporation only pays corporate taxes on its passive income. This eliminates the possibility of double taxation.
2. C Corporations
A C corporation is commonly referred to as a partnership or LLC. It can be used as a hybrid type of business structure that allows it to carry out its operations through its shareholders. It’s also able to benefit from various tax benefits.
Unlike an S corporation, a C corporation can have multiple shareholders from different backgrounds. This allows it to have employees who are also eligible to be its shareholders. However, it’s important to note that a C corporation has a board of directors. This type of business entity is responsible for making decisions and overseeing its operations.
3. Non-Profit Corporations
Unlike a traditional corporation, a non-profit organization doesn’t make a profit. Instead, it relies on donations and financial support to operate its operations. This type of business entity is created to support a specific cause. Generally, a non-profit organization should be focused on improving the lives of individuals or groups.
Non-profit corporations are generally tax-exempt. They can receive various types of financial support, such as grants, private donations, and corporations. Since donations to non-profit organizations are typically tax-deductible, it’s important to note that these types of businesses are different from for-profit corporations.
4. Limited Liability Companies
Limited liability companies (LLCs) are a type of business entity that focuses on separating the individuals from the business. Like other types of business structures, it’s also designed to protect its members from financial losses. This type of business entity can protect the personal assets of its owners in case of a lawsuit.
Unlike a C corporation, an LLC doesn’t need a board of directors. This type of business entity can be formed without a board of directors by filing articles of incorporation. In addition to being designed to separate its members from the business, an LLC can choose any type of structure it wants.
5. Sole Proprietorships
A sole proprietorship is a type of business structure that allows individuals to own a single business. Unlike a corporation, this type of business entity doesn’t have legal separations between the owners. This means that the individual is still financially responsible for the damages and debts of the company.
While sole proprietors can hire workers or contractors, the work that these individuals perform is still bound to the sole proprietorship. This means that the individual is still financially responsible for the damages and debts of the company.
6. General Partnerships
A general partnership is a type of business structure that allows individuals to structure their business as they see fit. However, all of its members are financially responsible for the damages and debts of the company. This type of business also has the potential to lose the members’ assets in the event of a lawsuit.
Your needs will change over time, so you should always consider the various types of business structures that will work best for your business. If you feel that one of these structures may not be the right one for your business, then you can start the process of restructuring it.
