Which Business Type is Best for My Company?

What does LLC, LP, LLP, PC, S-corp Mean?

If you are considering starting a small business, you may be trying to sort out the different types of businesses and wondering which type is best for you. Each type is best for a specific purpose or situation, relating to taxes, liability, and your ability to control the profits and losses of the business.

Sorting out the acronyms, like LLC, LLP, and PC, can be tricky, but this run-down will help.

Three Types of Business Organizations

there are three basic types of business organizations;

Corporations. A corporation is a business that is totally separate from its owners. The owners are shareholders. Some owners may also be executives or employees and are paid as employees for these duties. An S corporation is a specific type of corporation. 

Multiple-owner Businesses. This type of business, owned by several individuals, includes partnerships and limited liability companies. The owners are not employees. 

Single-owner Businesses. The sole proprietor business is owned by one person. This type of business also includes the single-owner LLC business. The sole proprietor business doesn't have to be registered with a state. 

Which Business Type in Which State? 

Business types are set by states, through the state business division or corporations office. Some states may allow certain types of businesses, and many states have different regulations and limitations on which business type can be established in a state and who can form each business type.

Check with your state secretary of state (some states use different terms for this department) and the business division (or another similar department) to see if the type of business you want to form is available in your state. All states allow corporations, partnerships, and LLC's, but some other variations on these basic business types may or may not be available. 

Sole proprietor businesses and S corporations are not created by registering with a state. See below for more information on how sole proprietorships and S corporations are set up. 

1
Sole Proprietorships

A sole proprietorship is a type of business operated by one individual; the business is considered part of the individual, not a separate entity. The business profits and losses are included on the individual's personal tax return, and the individual retains personal liability for the business debts and lawsuits.

If you want to start a sole proprietorship business, you just get a business bank account and start taking money from customers.  More

2
Corporations

A corporation is an entity which is separate from its owners. The corporation is formed under the laws of the state in which it is operating, with Articles of Incorporation

The corporation pays its own taxes, and the owners pay taxes on their ownership shares as shareholders and some owners as employees.  More

3
Subchapter-S Corporations (S-Corporations)

A subchapter S corporation (or S corp) is a corporation which has the benefits of limited liability of a corporation but which is taxed as a partnership, with the income or losses flowing through to the individual shareholders.

The Subchapter S corporation isn't set up by registering with a state. First, you must set up a corporation, then you elect S corporation status.  The election must be done within a specific time period, so check with your tax professional or CPA to make sure the election is done correctly.  More

4
Limited Liability Companies

All states give you the ability to set up an LLC by registering Articles of Organization or similar documentwith the state. 

A limited liability company (LLC) is not a corporation, but it has the liability protection of a corporation and other benefits, like ease of formation. You can have a single-member LLC which pays taxes like a sole proprietorship, or a multiple-member LLC which pays taxes like a partnership. You can even have an LLC that's taxed like a corporation or an S corporation. 

There are few drawbacks to forming an LLC.

If you want to set up several LLC's, you may also want to look into the Series LLC, a new type of LLC which is available in a few states. In a Series LLC, you can have a parent LLC and many sub-LLC's, each with separate liability. More

5
Partnerships

A partnership is a business entity with individuals who share the risk and benefits of the business. A partnership may include general partners, who bear the liability for partnership debts and for actions of the partnership. It may also include limited partners who are merely investors and who do not share in the day-to-day operations of the business and who do not share in liability.

You may also form a specific type of partnership, depending on the regulations of your state. Some possibilities are general partnerships, limited partnerships, and limited liability partnerships. Read more about these partnership variations below and check with your state to see if they are on the "approved" list.  More

6
Professional Corporations (PCs)

A professional corporation is a specific type of corporation for professionals, such as attorneys, doctors, architects, and accountants. In some states, these professionals can form a corporation, but with the distinction that each professional is still liable for his or her own wrongful professional actions. More

7
General Partnerships

A general partnership is a partnership which includes only general partners. Under this structure, all partners participate in the day-to-day operations of the partnership and all partners bear personal responsibility for debts and liabilities of the partnership. More

8
Limited Partnerships

If a partnership has both general partners and limited partners, it is sometimes termed a "limited partnership." A limited partnership is an entity distinct from its partners. As with a "partnership," the general partners deal with the day-to-day operations of the partnership and they have liability for debts and for actions of the partners. Limited partners do not participate in day-to-day operations of the partnership and they bear no liability for debts or actions of the partnership. More

9
Limited Liability Partnerships (LLPs)

Limited Liability Partnerships (LLPs) are formed with general partners, but all general partners are shielded from liability for the acts of other partners or employees. The LLP is similar to a limited liability company (LLC), but the LLP operates under partnership rules. More

10
Do I Need an Attorney to Start a Business?

Most states give you the ability to register a business - even a corporation - online.

But you still need startup documents, like corporation by-laws, partnership agreement, or an LLC operating agreement. Even if you register the business yourself, you should get help from an attorney for preparing these documents.

These business agreements need to be reviewed by an attorney to save you from legal hassles and disputes later.  More

Before You Start a Business - Some Questions to Ask Yourself

Questions to ask in considering different types of business include costs of setup, how much control you want or need, who receives profits (and losses), and what happens to the business if you are no longer around.