The Difference Between the 5 Most Common Corporate Structures
Entrepreneurs face no shortage of difficult choices when starting a new business. One of the most difficult and simultaneously most important of these is the decision about what sort of business entity they will create. Like most things, there’s no absolute correct answer for everyone. To make an informed decision about the structure of their startup, business owners should be familiar with these five types of organizations.
A partnership is a very common corporate structure in which two or more people own the business. This shared arrangement requires each of them to contribute capital, resources, and labor in exchange for a proportional portion of profits, or in some cases, losses. Among the elements that make partnerships appealing is the ability to assemble partners with diverse skillsets and backgrounds.
As the name suggests, a sole proprietorship is a corporate structure where one person owns the company outright. This means that they wield all decision-making power for the company, but they also bear the full responsibility for everything from leases to payroll. The profits can be immense for a sole proprietor, but so can the risks.
Cooperatives (or co-ops) are common in the medical and agricultural industries. Simply put, co-ops are affiliations of different businesses in the same field who benefit from shared resources, including ownership and its responsibilities. To ensure fairness and ethical practice, co-ops generally have elected board members and directors.
A limited liability corporation (or LLC) is a corporate structure that combines aspects of sole proprietorships, corporations, and partnerships into one hybrid unit. Essentially, members of an LLC are investors supporting the proprietor. They enjoy the tax advantages of a partnership, while they receive the protection of limited liability to their personal finances as they would in a corporation.
While LLCs may sound like the best of all possible worlds, there are some drawbacks which may make them less appealing to some investors. For one, members will be taxed regardless of whether the business turns a profit.
Finally, corporations (or C Corps) are a corporate structure in which the business is fully owned by its shareholders. Corporations are appealing in that they shield shareholders from most liability of the actions or issues associated with the company. Their setup, however, is intricate and complex, often making them less viable for startups.
It’s difficult to say exactly which organization will be best for your company. Knowing what the five main types are will help you dig deeper into the ones that sound like a good fit for you to learn more.