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Types of Small Business Structures

Deciding on a Legal Structure for Your Small Business

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Making the right decision about the legal and corporate structure of your business is critical to your long-term success. How you establish your business will affect ownership rights, your personal liability risks, and how you can operate the business. Some states do not recognize limited liability partnerships, so it is important that you check with a legal professional before establishing your business. The following is a simple breakdown of some of the different types of business structures most commonly formed in the United States.

1. Corporations

Corporations are governed by a set of Bylaws, which are usually filed along with Articles of Incorporation. Corporations become a legal entity that "owns" itself. Corporations can have their own bank accounts, assets, and even secure financing. All tax-exempt nonprofit organizations must be incorporated.

2. Limited Liability Company (LLC) (also called Limited Liability Corporation)

A Limited Liability Company (LLC) is sometimes also referred to as a Limited Liability Corporation, but the preferred term is "Company." It is one of the simpler ways to start a business, and is becoming one of the most popular ways to structure a business. An LLC is not a corporation, but has some of the protection benefits that a fully incorporated business structure has.

3. Limited Liability Partnership (LLP)

An LLP is similar to a general partnership; however, in an LLP, each partner is not liable for the actions of other partners. If one partner dies, the LLP automatically ceases. There are many forms or partnerships that can be formed.

4. Sole Proprietorships

The sole proprietorship is the easiest way to form a business. It is subject to the fewest regulations of all business structures. For tax and legal purposes, the business is the owner. When the owner dies the business automatically ceases.

5. Nonprofit and Charitable Organizations

There are many types of nonprofit organizations, and each has its own unique filing requirements. In general, to set up a nonprofit, you must establish a board of directors and incorporate. To become a tax-exempt organization, you must also file a request with the Internal Revenue Service. Some individual states also require a separate filing to be exempt from paying state taxes.
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