Did you know that 100 Million new businesses are created every year? The number might be quite enormous but having a business can be a blessing!
However, before you start a business, you should define what type of business you want to launch. From sole proprietorship to corporate structure, you can start your entrepreneurial journey in many ways.
So, in this blog, we will discuss more about the most coveted business categories and structure your business successfully!
8 Major Business Types & Its Classifications!
There are mainly 4 primary types of businesses, and those are sole proprietorships, partnerships, corporations, and LLCs. The reason for our expansion to 8 different types is that the other 4 types are widely popular, even if they are subcategories.
Let’s not waste any more time and dive deeper into it!
1. Sole Proprietorship
A sole proprietor is basically a one-man army! It is by far the most cost-effective and simplest form of a business. A sole proprietorship thrives on the enthusiasm and passion of a single entity or an owner.
Anyone who sells products by themselves is considered a sole proprietor. For any microbusiness, sole proprietorship is the way to go as it can be easy to organize and manage. There are no legal restrictions from most governments which allows business owners to quickly accommodate any product that they want to sell.
As the structure is quite linear, the proprietor does not need to worry about any corporate taxes or shared profits. The owner just needs to file a single submission of taxation on personal income.
However, the most daunting and risky factor of a sole proprietorship is that there is no safety net for liability, and 100% of the legal & financial responsibility falls onto the proprietor. In case of legal or financial damages, the owner is the only one held responsible.
Overall, sole proprietorship is ideal for those small businesses that are yet to grow and don’t need to worry about too much overhead. If you have an idea for a micro-business, then you can easily thrive with your company with full freedom.
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2. Partnership (General, Limited & LLP)
When you have two or more partners to start your business, then partnership is the most common category to go with. There can be many types of partnership businesses but usually, General partnerships, Limited partnerships & LLPs sum up to almost 90% of this category.
| Feature | General Partnership | Limited Partnership | Limited Liability Partnership |
|---|---|---|---|
| Ownership | Multiple general partners | One general partner & multiple limited partners | Two or more partners who share limited liability |
| Liability | Unlimited liability for all partners | Unlimited for the general partner, limited for others | Limited liability for all partners |
| Profit and Loss Sharing | Equal or mutually agreed ratio | Limited partners usually get returns based on their investments | As per contract agreements |
| Taxation | Pass-through taxation | Pass-through taxation | Pass-through taxation |
| Ideal For | Best for small businesses | Best for investors looking for a safe investment opportunity | Best for professionals looking for liability protection |
General partnerships can be thought of as the grouped version of the sole proprietorship business. In this category, multiple owners or co-owners come together and form a business. They enjoy the simplicity and ease of doing business like sole entrepreneurs.
From pass-through taxation to having equal rights over the business, these are very simple by-laws to follow. However, when it comes to sharing liability, all general partners need to chip in and carry the weight of all damages & financial costs.
Compared to General partnerships, Limited partnership businesses have mainly one major difference. Here, only one can be the general partner and the rest are mostly limited partners. So, the limited partners can enjoy limited liability depending on the investments they put into the business.
Here as well, all partners are subject to pass-through taxation so partners just need to pay a one-time tax on their income levels.
Lastly, Limited Liability Partnerships (LLPs) are a special category of business where multiple partners share limited liability. However, this category is only applicable to certain professionals in accounting, the law industry, and such, where one partner only needs to be responsible for one’s conduct.
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3. C Corporation
C Corp is what you think about when you say the word corporation. It is one of the most common types of corporate structure and is the ideal choice for any large company.
What makes a corporation different from a proprietorship business? The corporation becomes an individual entity that exists and is liable independently.
So, for a C corp, there will be multiple directors and they will form a board which will then guide the corporation on its course. As the corporation is a legally independent entity, the directors can enjoy limited liability for their actions.
Furthermore, a major advantage of C Corp is that it can raise funds from private VCs or publicly easily. By issuing common stock or preferred stock, a corporation can take funding and add a boost to its growth!
The two major downsides are the tedious & complex registration process and double taxation. However, the transfer of ownership & responsibilities is not difficult to handover to your successors!
If you can take on the complexities of starting a C Corp, then your road to success will be more streamlined than proprietorship or partnership businesses.
4. S Corporation
While being a Corporate entity, an S corporation is different from your traditional C corp. There’s a massive advantage of S Corp by not paying double taxes on income! The only taxation levied is on owners’ and shareholders’ personal income levels.
So, you can think of S Corp as a mix of both partnership & C corporation. However, there are some restrictions of S Corp to maintain the legal status:
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In the US, you can only take up to 100 shareholders. As a result, it’s difficult to raise funds by issuing stocks.
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The shareholders have to be the citizens of the country of the registered corporation
With such restrictions, it’s difficult for new entrepreneurs to register a company with an S Corporation status.
5. Limited Liability Company (LLC)
Comparing an LLC with a Partnership & C corporation can be quite confusing due to the shared similarities between these three businesses.
LLCs like C corps are legal entities and the shareholders enjoy limited liability. So, shareholders can protect themselves from taking the whole debts and damages accrued by the company.
Then, the similarity with partnership business is that LLCs can opt-in for pass-through taxation if they want. Basically, the tax flexibility is superior with LLCs compared to C corps.
The only disadvantage is the complex nature of the company structure which can be a dealbreaker for many entrepreneurs. For example, LLCs need to write & file incorporation articles and hire a registered agent for the paperwork from the creation of the company.
So, you should only think of starting an LLC when you have gathered all the right resources.
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6. Non-Profit Corporation
Non-profit corporations, in all reality, are very different from traditional companies or corporations. The most highlighting similarity with any corporation is that you need to file the incorporation articles and appoint a registered agent.
Other than that, Non-profit are very different in financial structure. As the name suggests, Non-profit corporations don’t need to share any dividend or profit with shareholders, instead, all the profits are either reinvested into the organization or spent on social causes.
Because of that, Non-profit organizations enjoy huge tax benefits and are completely exempt from any federal taxes. However, the company needs to attain the tax-exemption status to enjoy that benefit.
7. Cooperative
Co-ops have some unique characteristics that set them apart from any other categories we mentioned so far. A cooperative is a member or customer-owned entity which distributes equal rights & responsibilities to the members.
Due to the unique structure, there are no shareholders or directors and all decisions are guided through a consensus. That’s why it’s quite challenging to efficiently run a cooperative society.
Another downside of cooperatives is that there’s a very low possibility of raising funds like corporations such as bank loans or stock sells. As a result, most of the cooperative initiatives face liquidity crises in the long run.
For example, National Cooperative Bank, and AgriBank are some of the popular co-ops in the US and here members pool their income and earn profits from credit loans.
8. Joint Venture
Are you looking for a like-minded business to join forces? Well, that’s exactly what a joint venture means. When two or more companies pool their resources and form a new entity to diversify their business goals.
A famous example of such an alliance was BMW and Brilliance Auto Group’s joint venture: BMW Brilliance. It was formed to expand the manufacturing & sales in China as the country has restrictions on foreign automobile brands.
So, the main benefit is definitely leveraging each company’s top resources for a unified goal. However, the downside is that all the companies in the venture will need to bear the legal & financial responsibilities.
What Should You Consider Before Starting Your Business?
From starting to funding, your entrepreneurial journey will vastly depend on which business you decide to begin with. So, consider these pillars of a company before you jump into the chaos of business!
Liability
There’s a direct payoff between sharing risk and the return you earn. If you take a safe approach by forming a corporate structure, then expect the profit to be thin but with a safety net around your personal assets.
However, with the increased risk of proprietorship or partnership business, you can expect to enjoy a higher profit margin with less overhead!
Profit & Purpose
While most think of corporations as money-hungry entities, they can also serve the masses with a greater cause. You don't need to choose between purpose versus profit if your product & services help your customers immensely!
So, think about which structure can offer you both, or choose the type that prioritizes what you want your company to become!
Taxation
Generally, you need to pay taxes on your income one way or another. With sole proprietorship & partnership businesses, you can avoid the double-taxations but lose out on the rapid growth scaling.
On the other hand, corporate structure can give you exponential growth possibilities with increased financial liabilities. Thus, the structure of your business will vary depending on your requirements.
Funding
Do you want to raise funds as soon as possible? Or, do you want to start out slow and test the waters? As partnerships or cooperatives have a hard time raising funds, your growth is impacted heavily if you want to show huge sales figures.
Then again, your sole proprietorship business can benefit from investment platforms or FNF capital investments.
Lastly, if your goal is to build social businesses, then non-profit is the way to go with grants & donations being your primary source of investments!
FAQs
Which business type has the least tax burden?
Sole proprietorships, partnerships as well as LLCs have the least tax burden as those business types don’t involve double taxation.
Which business type is easiest to start?
Generally, a sole proprietorship business has a simple procedure and very few restrictions to start. A partnership business is also very easy to start if you want to start the business with multiple partners.
What’s the difference between an LLC and a Corporation?
While both are corporate types of businesses, LLC offers better taxation flexibility compared to a C or B corporation. You can enjoy pass-through taxation with LLC while C corporation requires double taxation.
Bottom Line
Finally, now you can understand the most common business types out there and choose the one that matches your requirements. Just explore, assess, conceptualize and implement.
Once you start building your business, we’re sure it’ll all come along just fine!
