Businesses are generally organised into one of a handful of legal structures, and the type chosen shapes everything from how much personal risk an owner takes on to how the business gets taxed.
Sole Proprietorship
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A sole proprietorship is owned and run by a single person, with no legal separation between the owner and the business itself.
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It's the simplest and cheapest structure to set up, often requiring no formal registration at all beyond basic tax paperwork.
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The major downside is personal liability. Any debts or legal claims against the business fall directly on the owner's personal assets, since there's no legal shield between the two.
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Profits and losses flow straight through to the owner's personal tax return, keeping filing relatively straightforward.
Partnership
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A partnership involves two or more people sharing ownership, each contributing money, skills, labour or property to the business.
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General partnerships split profits, losses and liability among all partners equally, and are easy to form, sometimes even without a formal written agreement.
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Limited partnerships include at least one general partner with full liability, alongside limited partners whose risk is capped, though they also have less say in daily decisions.
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Limited liability partnerships (LLPs) protect all partners from personal liability for the business's overall debts, though each partner remains responsible for their own professional conduct, a structure common among lawyers and accountants.
Limited Liability Company (LLC)
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An LLC blends the liability protection of a corporation with the simpler tax treatment of a sole proprietorship or partnership.
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Owners, referred to as members, aren't personally liable for the company's debts or legal issues, keeping personal assets separate from business risk.
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By default, the IRS treats LLCs as pass-through entities, meaning profits get taxed on the owners' personal returns rather than at the business level, though an LLC can elect corporate tax treatment if that's more favourable.
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LLCs generally involve less paperwork and fewer ongoing compliance requirements than a full corporation.
Corporation
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Type |
Key Feature |
|---|---|
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C Corporation |
The standard corporate structure, taxed separately from its owners, which can lead to double taxation on profits and dividends |
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S Corporation |
Meets specific IRS requirements to pass profits through to owners' personal returns, avoiding corporate-level tax |
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B Corporation |
A certified structure balancing profit with a stated social or environmental mission |
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Corporations exist as a legal entity entirely separate from their owners, meaning the business itself can be sued, taxed, or continue operating even if an owner or shareholder leaves.
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They offer the strongest personal liability protection of any structure, and the ability to raise capital by issuing shares makes them attractive to investors and easier to secure loans for.
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The trade-off is significantly more paperwork, stricter compliance requirements, and generally higher costs to set up and maintain.
Nonprofit Organisation
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A nonprofit exists to serve a public, charitable, educational or social mission rather than generate profit for owners or shareholders.
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Nonprofits can apply for tax-exempt status, meaning the organisation itself doesn't pay income tax on funds used toward its stated mission.
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Any surplus revenue gets reinvested back into the organisation's programs and operations rather than distributed to individuals.
Cooperative
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A cooperative is owned and controlled by the very members it serves, whether that's employees, customers, or suppliers, rather than outside investors or a small ownership group.
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Profits typically get distributed among members based on their level of participation or usage, rather than by how much capital they invested.
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This structure is common in agriculture, credit unions, and community-run retail businesses, where shared control matters as much as shared profit.
