What are the 5 basic legal structures for a company in the United States?

During the next few posts we’ll be covering the different ways you can structure a new company in 2023. We’ll discuss the differences, advantages and disadvantages of a Sole Proprietorship, Partnership, LLC, C Corporation and S Corporation, and Nonprofit Corporation. In most cases, a new business without outside funding by wealthy investors will either be a Sole Proprietor or an LLC (Limited Liability Company) type of organization.

There are five basic legal structures for a company in the United States:

  1. Sole Proprietorship: This is a business owned and operated by a single individual. It is the simplest and most common form of business structure. But that doesn’t mean it’s the best for all new companies! Being a sole proprietor means you’re personally liable for everything the company does. Legally, there’s no difference between you and the business.
  2. Partnership: This is a business owned and operated by two or more individuals. There are two types of partnerships: general partnerships, in which all partners have equal management and financial responsibility, and limited partnerships, in which one or more partners have limited liability for the debts and obligations of the business.
  3. Limited Liability Company (LLC): This is a hybrid business structure that combines elements of a partnership and a corporation. LLC owners, called members, have limited liability for the debts and obligations of the business.
  4. Corporation: This is a separate legal entity owned by shareholders. The shareholders elect a board of directors to oversee the management of the company, and the company is managed by officers who are responsible for its day-to-day operations. Corporations are divided into two types, C Corps and S Corps. We’ll get into both later.
  5. Nonprofit Corporation: This is a special type of corporation that is organized for a charitable, educational, or other public benefit purpose, rather than for the benefit of its shareholders. Nonprofit corporations are tax-exempt and do not have owners, but they do have directors who are responsible for managing the organization.

Each type of business structure has its own advantages and disadvantages, and the best structure for your business will depend on your specific needs and circumstances. Many new companies that only provide part-time income may be a good fit for a Sole Proprietorship. On the other hand, a business that you plan to work at full time or even hire a few employees can often use the extra liability protection an LLC gives you.

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