8 Types of Business Ownership for a Growing Small Business

| January 25, 2023

Benefits and limitations of the most common types of business structures to help you weigh your options and make an informed choice.

When you’re looking to launch a new venture or take your existing small business to a higher level, it’s important to choose an ownership structure that can support your goals. The main considerations when choosing a structure for your business are simplicity, liability, control, financing, and taxes.

Here are the 10 types of business ownership and classifications:

  • Sole proprietorship
  • Partnership
  • LLP
  • LLC
  • Series LLC
  • C corporation
  • S corporation
  • Nonprofit corporation
  • Benefit corporation
  • L3C

Common types of business ownership

The most common forms of business ownership are sole proprietorship, partnership, limited liability partnership, limited liability company (LLC), series LLC, and corporations, which can be taxed as C corporations or S corporations.

In addition, social entrepreneurs can choose from nonprofit corporations as well as benefit corporations and low-profit limited liability companies (L3Cs). States provide different business structures with unique requirements and privileges.

Some states, for example, provide special structures for professional firms such as professional LLCs (PLLCs) and professional corporations (PCs). Before making any decisions about your business structure, you’ll want to investigate the specific laws of your state.

It’s possible to form your business in a state other than your home state where the laws and small business taxes are more advantageous. This is not a simple decision, however, so you would want to do your research and talk to legal and financial advisors before making that call.

1. Sole Proprietorship

Sole proprietorship is the default structure of a business that hasn’t filed any paperwork to create a legal entity. It is the simplest form of business ownership, and the structure of choice for four out of five small business owners with no employees.

Advantages of a sole proprietorship

Sole proprietorship is a simple ownership type with several advantages, including the following:

  • Simplicity: In most cases, sole proprietors operating under their own names can simply get to work without filing paperwork with the state. Sole proprietorships may be exempt from certain licensing and registration requirements such as obtaining a business license to sell online. This makes sole proprietorship the simplest and least expensive among the different types of business ownership.
  • Control over the business: A sole proprietorship is owned by a single person. There’s no need to get consensus before making decisions about the business: It’s all yours.
  • Pass-through taxation: Profits from a sole proprietorship pass through to the owner’s personal income, simplifying taxes significantly. As a pass-through entity, a sole proprietorship qualifies for the 20% qualified business income (QBI) deduction established under the 2017 Tax Cuts and Jobs Act. Tax software can help you ensure that you’re getting all of the tax credits and deductions your business qualifies for.

Disadvantages of a sole proprietorship

Sole proprietorships do have their disadvantages compared to other types of ownership.

  • Legal liability: A sole proprietorship passes more than income through to its owner. Legally, the two are inseparable. That means any lawsuits or other claims against the business are launched personally against the owner. As a sole proprietor, you’re putting your personal assets on the line every day that you operate your business.
  • Financial risk: In addition to legal risks, sole proprietors take on all financial risk of the business personally. Your home, bank accounts, cars, and other assets can be seized to satisfy claims by creditors if your business hits a rough patch financially.
  • Access to funding: Because of their informal structures, sole proprietorships generally have a harder time accessing loans and investment capital than other business ownership types. This can make it difficult to provide competitive benefits such as small business health insurance.

2. Partnerships

Partnerships, often called general partnerships, are businesses with more than one owner. If you team up on a business venture without forming a legal business entity through the state, your business is a partnership by default.

While they don’t require formation paperwork, there may be limitations on naming a partnership in your state, which may necessitate filing a “doing business as” (DBA) name. Partnerships are usually founded on formal partnership agreements outlining the ownership share, rights, and obligations of each partner.

Partnerships are a popular type of company ownership for professional firms.

Advantages of a partnership

Partnerships provide some notable advantages, including:

  • Simplicity: Partnership is a relatively simple structure since it doesn’t require formation paperwork. Depending on the number of partners and the terms of your agreement, they can also be relatively simple to run.
  • Pass-through taxation: Partnerships are pass-through entities, with income passing through to partners proportionally based on share of ownership. If your partnership is split evenly down the middle, for example, 50% of the business’s profits would pass through to each partner’s personal income. Partnerships qualify for the 20% QBI deduction.
  • Control over the business: Partnerships allow their owners to participate in the business directly and allocate profits and control according to their own wishes. New partners can be brought in relatively easily.

Disadvantages of a partnership

Following are some drawbacks of partnerships:

  • Legal liability: Like sole proprietorships, partnerships open the partners up to legal liability for the firm’s operations. Liability insurance can address these risks, but insurance has limits.
  • Financial risk: Partners also take on financial liability for the business, putting their personal assets at risk in case of financial hardship or bankruptcy.

3. Limited Liability Partnership (LLP)

An LLP is a legal entity available in some states to provide the simplicity and pass-through taxation of a partnership while limiting liability for the partners. In addition to a formal operating agreement among partners, LLPs generally require registration with the secretary of state.

Where available, they are a popular type of business entity with professionals such as doctors, lawyers, accountants, architects, and engineers.

Advantages of an LLP

LLPs provide their owners with many advantages, including:

  • Limited liability: Like an LLC, an LLP is a separate legal entity with its own assets and obligations. This protects partners from personal liability for legal and financial claims against the firm, although the degree of protection varies by state. Generally, the partners’ liability is limited to their investments in the firm. Partners may still be liable for their own personal errors and misconduct, so liability insurance is generally still required.
  • Ownership and control: Like partnerships, LLPs allow owners to actively participate in the business and control how it is run.
  • Tax options: LLPs may be considered pass-through entities, which can be advantageous for owners, particularly with the 20% QBI deduction. Their tax treatment varies by state, however.

Disadvantages of an LLP

Some limitations of LLPs include:

  • Limited availability: LLPs are not available in every state, and they may only be available to certain types of businesses.
  • Increased complexity: Because LLPs are treated differently in different states, partners will need to research their state requirements and tax laws thoroughly before choosing this structure.