7 types of business ownership to consider in 2024

How you set up your business can have major consequences, from how easy it is to operate on a day-to-day basis to how you pay your taxes. It can also determine whether you are personally liable if your business is sued and how, or even if you can raise funds by selling stocks. That’s why it’s crucial to choose the right business structure for you and your business.

To help you make the best decision, we’ve provided an overview below of the seven different types of business ownership you’ll want to consider, along with their pros and cons and what makes them the best choice for certain types of businesses.

Business ownership types at a glance

7 common types of business ownership

1. Sole proprietorship

A sole proprietorship is an unincorporated business entity that is operated by a single person. Because it lacks a formal corporate structure, a sole proprietorship is simple to set up and operate. In most cases, you can start one without fees and without filing any paperwork unless you intend to use a fictitious name (DBA). Technically, you don’t even need a separate bank account for your business since any profits or losses pass through to you on your personal income taxes. 

However, a sole proprietorship comes with a major risk: personal liability. Without a business entity separating you from your business, not only do profits and losses pass through to you, but your business’ liabilities do, too. 

“If your business gets into hot water, so do you,” said Jon Morgan, CEO of Venture Smarter, a consulting firm specializing in startups and small businesses. “No one wants to risk their car, house or that vintage record collection they’ve been curating since college.”

Pros

• Easy setup with little to no paperwork.
• Profits pass directly to owner.
• Owner makes all the decisions.

Cons

• No liability protection.
• Insurance necessary to protect personal assets.
• Unable to bring on investors.

2. Partnership

A partnership is similar to a sole proprietorship except that two or more individuals co-own the business. Who controls the business and how much liability each partner has depends on the type of partnership you decide to form. 

For example, a general partnership equally divides the management of the business, its profits and any liability between the partners. Conversely, a limited partnership allows one partner to have most or all the control and liability while the other partner has limited or no control and liability. 

Limited liability partnerships (LLPs) fall somewhere in between, allowing partners to remain equal but sheltering their personal assets from the business and from each other. For example, if an attorney in a law office commits malpractice, a limited liability partnership would protect the other partners from repercussions.

Pros

• Easy and inexpensive to set up.
• Simple to operate, with pass-through taxation.
• Partners can pool talents and resources. 

Cons

• No liability protection, depending on structure.
• Dissolves if one partner leaves or dies.
• Potential for conflict between the partners.

3. C corporation

Corporations are businesses that exist as a separate entity from their owners. Unlike a sole proprietorship or partnership, a corporation is legally liable for its actions and can live on after the death or departure of its owners. While there are several types of corporations, most large business entities are C corporations or C corps. 

Named in reference to Subchapter C of Chapter 1 of the Internal Revenue Code, C corps are owned by shareholders and pay corporate income tax directly to the IRS. Instead of profits and losses passing through to owners (shareholders), C corps pay taxes to the IRS and profits are then divided among the shareholders. The shareholders are then taxed on what they earn from the business. 

Despite this double taxation of the business and the shareholders, C corps have several advantages over other types of business entities. First, they can have an unlimited number of investors, including foreign investors. They can also issue more than one class of stock. 

Pros

• Provides limited liability.
• Company exists in perpetuity.
• Unlimited shareholders, including foreign investors.
• Can offer more than one class of stock.

Cons

• More complicated to set up.
• Required to have shareholder and director meetings.
• Corporate profits subject to double taxation. 

4. S corporation

While an S corporation, or S corp, is also a separate entity that offers shareholders liability protection, it doesn’t pay taxes to the IRS like a C corp. Rather, an S corp’s profits and losses pass through to its shareholders, who are taxed on their personal income tax. This avoids the double taxation shareholders experience with a C corp.

An S corp also has several constraints that a C corp does not, such as having no more than 100 shareholders. The business must be U.S.-based, and shareholders must be U.S. residents. Finally, S corps can only issue one class of stock, and some entities, including certain financial institutions and insurance companies, are ineligible to operate as an S corp. 

Pros

• No double taxation. 
• Provides liability protection.
• Allows for business to issue stocks.

Cons

• Complicated to set up.
• Restrictions on shareholders.
• More difficult to manage than LLC.

5. Limited liability company

A limited liability company (LLC) combines the best of sole proprietorships, partnerships and corporations. Easy and inexpensive to set up, it offers the liability protection of a corporation without the complicated regulations or shareholders that come with one. As with a sole proprietorship or partnership, profits and losses pass through to the owners in proportion to their percentage of ownership, and they claim earnings on their income taxes.

In addition to liability protection, LLC status lends a business a certain level of credibility. “Hobbyists don’t have LLCs,” said attorney Steve Replin. “Only serious business people have gone to the trouble of creating their own LLC.” 

On the other hand, an LLC can limit your business since it can’t raise funds or issue stocks. If you plan to go public, a corporation might be a better option.  

Pros

• Liability protection.
• Easy to operate.
• Business credibility.

Cons

• More expensive to operate.
• Owners responsible for self-employment taxes.
• Can’t issue stocks or raise funds.

6. Nonprofit corporation

Nonprofit corporations are formed to do charity, educational, religious, literary or scientific work, not to enrich their members. Because of this, nonprofits don’t pay state or federal income taxes, but to maintain their tax-exempt status, they must adhere to strict rules about what they can do with their profits. For example, they can’t distribute profits to members. Instead, nonprofits must direct their profits toward charitable goals. 

Most nonprofits are organized as corporations and apply for tax-exempt status under Section 501(c) of the Internal Revenue Code. Like other corporations, they file articles of incorporation with the secretary of state where they are located, have bylaws and hold regular board meetings.  

Pros

• Tax-exempt status.
• Able to further a cause.
• Eligible for public and private grants.

Cons

• Extensive paperwork.
• Intense IRS scrutiny.
• Expensive to maintain. 

7. Cooperatives

Typically referred to as a co-op, a cooperative is an association of people, organizations or businesses designed to benefit those using its services. A common example is a food co-op that sells food items to its consumer members at lower prices. Similarly, farmers can form a co-op to purchase supplies as a group and to share equipment. 

Members become part of a co-op by purchasing shares, and they either pay for the goods and services or volunteer their labor (i.e., stocking shelves at the food co-op) in exchange for them. 

Not all co-ops generate a profit, but those that do divide profits equally among their members, all of whom have one vote regardless of how many shares they hold. Because everyone gets an equal say, decision-making can take longer than it might in other types of business structures. However, this is offset by co-op’s tax-exempt status on federal and most states’ income taxes. 

Pros

• Pooled resources.
• Operate to benefit members.
• No federal income tax.

Cons

• Slow decision-making process.
• Not the most profitable type of business entity.

Which business structure is best for your business?

Determining which business structure is best for your business depends on five main factors: 

• Your industry.
• How much paperwork you can tolerate.
• Personal liability.
• Taxation.
• Fundraising.

Industry 

Certain businesses lend themselves to one type of business ownership over another. For example, real estate investment companies favor setting up an LLC because it provides liability protection. Additionally, federal and state laws prohibit some businesses from using certain business structures. 

Paperwork

Sole proprietorships and partnerships require minimal paperwork, while corporations, including nonprofits, land at the other end of the spectrum. If you want to keep things simple, stick to a sole proprietorship, partnership or even an LLC. 

Personal liability 

With sole proprietorships and partnerships, liability passes through to the business owner or owners. This puts your personal assets at risk, although you can purchase liability insurance to protect against this. 

Taxation

The type of business ownership you choose will affect how your business’ profits are taxed. For example, a C corp pays taxes on its profits and distributes the money to its shareholders, who then pay income tax on their gains. In a sole proprietorship, the profits pass through to the owner’s personal income tax. 

Fundraising 

Some types of business ownership allow you to fundraise, while others don’t. For example, an LLC can’t issue stocks, but an S corp can. On the other hand, an S corp is limited by the number of shareholders it can have and whether it can accept foreign investments, while a C corp is not. 

Although it is important to choose the right type of business ownership initially, it is possible to change it if you realize you made the wrong choice or if your company outgrows its current structure. Just beware that the process could have tax ramifications and unintentionally cause the dissolution of your business. 

Frequently asked questions (FAQs)

How do I choose a business structure?

There are many things to consider when choosing the right business structure for you. One of the most important is whether you want to create a barrier between you and your company or whether you want income (and liability) to pass through to you. 

You’ll also want to think about fundraising since only certain business structures can issue stocks.

What are the most common types of business structures?

According to the Internal Revenue Service, the most common types of business structures are:

• Sole proprietorships.
• Partnerships.
• Corporations.
• S corporations.
• Limited liability companies (LLCs).

Which business structure has the least amount of risk?

Corporations have much less risk than sole proprietorships and partnerships because they are separate entities from their owners, who do not have personal liability. In contrast, if your sole proprietorship or partnership is sued, the liability flows through to you personally, risking your business, home, savings and other possessions.