6 Types Of Business Ownership: Definitions, Pros & Cons

• Liability: Full liability
• Taxes: Taxed to owner
• Key Benefit: No formal filing

A sole proprietorship is an unincorporated business entity that is owned by a single person. This is a common business structure for many smaller teams to keep things simple. While a sole proprietorship doesn’t often have any business entity associated with it, it is possible to form a sole proprietorship as a limited liability company (LLC) or an S-corporation. As long as the LLC or corporation is owned by one member or shareholder with pass-through taxes, it is still considered a sole proprietorship. But for the sake of this comparison, we’ll treat the sole proprietorship as a business structure with no separate entity formed.

A sole proprietorship doesn’t limit the personal liability of the owner. This is why legal experts don’t highly recommend sole proprietorships. However, for a small business that is just getting started, it may be the best option that fits in the budget. A sole proprietor may file a DBA (“doing business as”) with the county clerk’s office to ensure they have a unique name that no one else can use. There is often a nominal fee.

Pros	Cons
Free or low cost Easy to maintain Owner control	Personal liability No tax benefit

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• Liability: Full liability
• Taxes: Taxed to owners
• Key Benefit: Defines roles

A general partnership is an agreement between two or more individuals who agree to share in the profits, losses and legal liabilities of a company. In the general partnership, each partner is responsible for filing their own taxes based on the revenues passed to them through the partnership. There is no limit to their personal liability, meaning that the partners have unlimited responsibility for company debts and legal liabilities.

Similar to a sole proprietorship, the partnership doesn’t need to form a formal entity but may. A general partnership is best suited for new companies testing the waters before investing in a formal structure. They may want to see how the partners work together and if the company has the merits to be successful.

Pros	Cons
Less expensive than forming an entity with the state Little paperwork Pools talent	Unlimited liability No tax benefit

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• Liability: Limited to company
• Taxes: Taxed to members
• Key Benefit: Reduces liability

A limited liability company (LLC) is a business structure that limits the personal liability of LLC members. The LLC becomes an official business entity once it is registered with the Secretary of State in the state in which the business resides and operates. By limiting the personal liability of members, the LLC ensures that only the company assets can be used to pay off debts and address other liabilities. Members can’t be held personally responsible for them.

The LLC is more complex to maintain than a sole proprietorship or general partnership, as annual filing requirements exist. However, it is less complex than a corporation. This makes it a good option for business owners wanting to limit liability without adding a lot of extra work.

Pros	Cons
Limits liability Less paperwork Flexible profit distribution	More costly than sole proprietorship Ownership transfer is harder than a corporation

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• Liability: Limited to contribution
• Taxes: Taxed to partners
• Key Benefit: Reduces liability of partners

A limited liability partnership (LLP) is a partnership structure registered as a business entity that reduces each partner’s liability to what they have contributed. The risk for the business is spread among the partners who each have defined roles in the company. Because liability is limited, creditors cannot go after partners’ personal assets for company debts and liabilities.

An LLP is a popular choice among professionals who create business groups, such as lawyers, accountants, doctors and wealth managers. Partners may buy into the LLP, limiting their downside to the amount of capital put into the partnership.

Pros	Cons
Limits liability Flexible ownership Pass through taxes	Management duties equally divided More costly than a general partnership

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• Liability: Limited to business assets
• Taxes: Taxed as corporation
• Key Benefit: Easy to add shareholders/owners

A C-corporation is a business entity that is set up with shareholders as the owners of the company. Shareholder liability is to the liabilities of the company, meaning their personal assets are not at risk. Unlike an LLC, where the revenues go directly to the members, the C-corporation is taxed as its own entity. This can result in double taxation if the entity is taxed and then the owners are taxed when distributions of profits are made to them.
The C-corporation is overseen by a board of directors and must file an annual report with the state.

The C-corporation is best suited for a company seeking to bring on investors and outside financial backing. The business can easily assign shares to new owners, making this a flexible option as a business grows and expands.

Pros	Cons
Limits liability Easy to bring on investors Flexible ownership	Potential for double taxation Cost More paperwork than other structures

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• Liability: Limited to business assets
• Taxes: Passed to owners
• Key Benefit: Board of directors oversight

An S-corporation is similar to a C-corporation in that it registers with the state as an entity, gives shares to owners and has a board of directors. The difference between a C-corporation and an S-corporation is that an S-corporation elects to have revenues passed down to the owners. This eliminates the possibility of double taxation as a corporation.

The S-corporation functions much as an LLC except that it has shares and a board of directors. This makes it suitable for companies with multiple founders who want the oversight of the board while being able to avoid double taxation.

Pros	Cons
Limits liability Simple ownership transfer Board of directors oversight	Cost More administration than LLC

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When choosing a business ownership structure type, think about what you’re protecting, whether or not there will be other owners, whether you plan on getting investors or not and how you want the taxes to be paid. Most people consult with a lawyer and a tax professional before making a final decision on which entity is best.

One of the most important things you can do as an owner is to limit your personal liability for business debts and liabilities. This is what most entities start with—reducing your exposure. From there, you want to consider how the profits are distributed and thus taxed. If profits are passed through, that means that you add the profits to your personal tax return. This avoids double taxation, which can happen with a C-corporation.

However, if you plan on getting outside investment or plan on selling the company, a C-corporation is the easiest to manage. That being said, corporations have boards of directors and must have annual meetings and have more required filings than other business structures.

Ultimately, you want to choose a business type that protects you while meeting your tax and growth needs.

Bottom Line

Starting a new business can be overwhelming because of all the choices that are available for the business type. Take the time to review what you want for liability structure, tax structure and how flexible you want ownership to be. These are the key considerations and differences between the different entity types.

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