Choosing the Right Business Structure: What Every Owner Should Know

   What business structure to choose isn't often discussed. More and more we see customers utilize online business formation platforms. While they can be easy to use and helpful it is important to understand the pros and cons of different legal structures, particularly when your business is just starting. Oftentimes professionals like myself will defer to your accountant for the ultimate decision on what business structure is most advantageous for your specific business as they have a more detailed understanding of your finances.

   The choice you make impacts how you’re taxed, how much liability you take on, how you raise money, and even how easy it is to grow or exit the business later on.

   This guide walks through the most common business structures used in the U.S., with a focus on the key advantages and trade-offs of each.

1. Sole Proprietorship

   A sole proprietorship is the simplest and most common type of business structure. It's owned and operated by one person and doesn't require formal registration in most states (aside from local business licenses or permits).

Pros:

• Easy to set up and manage

• Complete control of the business

• Pass-through taxation (profits reported on the owner’s personal tax return)

Cons:

• No legal separation between the business and the owner

• Personal liability for all debts and obligations

• Harder to raise capital

Best for: Freelancers, consultants, and low-risk startups just testing the waters.

2. Partnership (General and Limited)

   A partnership involves two or more people co-owning a business. There are two primary types:

• General Partnership (GP): All partners share management and liability.

• Limited Partnership (LP): One or more general partners manage the business and are personally liable, while limited partners invest but don't manage.

  
  

Pros:

• Simple to form with a partnership agreement

• Shared responsibility and complementary skillsets

• Pass-through taxation

Cons:

• Shared liability (in GPs)

• Potential for conflict between partners

• Must legally dissolve if a partner leaves (unless structured otherwise)

Best for: Family businesses, professional services, or firms with clear operating agreements.

3. Limited Liability Company (LLC)

   LLCs blend the simplicity of sole proprietorships with the liability protection of corporations. They're governed at the state level and are highly flexible in structure.

Pros:

• Limited personal liability

• Flexible taxation (can choose to be taxed as a sole prop, partnership, or corporation)

• Fewer corporate formalities than corporations

Cons:

• More paperwork and fees than a sole proprietorship

• Annual state fees vary

• Limited lifespan in some states unless renewed

Best for: Small businesses looking for liability protection without corporate overhead.

🏢 4. Corporation (C-Corp and S-Corp)

   Corporations are legal entities separate from their owners. They offer the highest level of liability protection but come with more complexity and compliance requirements.

C-Corporation (C-Corp)

   A standard corporation that can issue stock and attract investors.

Pros:

• Strong liability protection

• Unlimited shareholders

• Ability to raise significant capital

Cons:

• Double taxation (corporate profits and shareholder dividends)

• Heavier regulations and formalities

• Complex setup and operation

Best for: Startups planning to scale, seek outside investment, or eventually go public.

S-Corporation (S-Corp)

   A special designation for small businesses that meet IRS requirements.

Pros:

• Pass-through taxation

• Liability protection

• Avoids double taxation

Cons:

• Limited to 100 shareholders

• Shareholders must be U.S. citizens or residents

• More strict IRS rules

Best for: Profitable businesses wanting corporate protection with tax advantages.

5. Nonprofit Corporation

   Nonprofits are structured like corporations but exist to serve the public good, not to generate profit. They must apply for tax-exempt status under Section 501(c)(3) of the IRS code.

Pros:

• Exempt from federal income taxes

• Eligible for public and private grants

• Limited liability for directors and officers

Cons:

• Must operate for a charitable, religious, or educational purpose

• More complex compliance and reporting

• Cannot distribute profits to owners

Best for: Charitable organizations, foundations, and community-based missions.

How to Choose the Right Structure

   Every business is different, and what works for one may not work for another. Consider these questions:

• How much risk does your business carry?

• Do you plan to raise outside capital?

• How many owners will there be?

• Do you want pass-through taxation or corporate-level taxation?

• How much administrative work are you willing to take on?

   A qualified accountant or business attorney can help you make the right call based on your goals, financials, and state-specific regulations.

Final Thoughts

   Your business structure affects everything—from how much you pay in taxes to your ability to grow. Taking the time to understand your options and making an informed choice can set you up for long-term success.

   And remember: as your business evolves, your structure can too. It’s not a one-time decision.

👉 If you’re unsure which structure makes the most sense for your business, reach out. We’re happy to talk through your options and connect you to trusted professionals who can guide the process.

About the Author

   Jared Holmes is the founder of Brilliance Funding Partners, where he helps business owners navigate the commercial lending landscape with confidence. With 9 years of hands-on experience in SBA lending, equipment financing, and working capital solutions, Jared focuses on asking the right questions and delivering financing strategies that make sense for each business. Connect with Jared for a personalized conversation about your options.