Do you know all of the possible types of business your startup could be? It’s probably not at the top of the list — but it should be. The legal formation of your business — or, in other words, the type of business you form — affects everything from the structure of your company to your personal and professional liability to how you pay taxes. It’s a lot — we know.
And when you’re setting up a startup, you have a lot going on. You have to figure out your market. You have to determine what you’re going to sell them. You have to create a website, social media presence, a blog. You have to pitch and find investment and, and, and…
The list is so long that it can be overwhelming. But if you’re committed to getting a startup going, then you’re committed to figuring out all of those things and what type of business your company should be. We have guides to help you every step of the way and for this step, here’s a general look at the most types of business entities. If one sounds interesting, click through to the full guide. With a little research, we’re sure you’ll find your perfect fit.
LLC means “limited liability corporation,” which is a type of business structure that creates a legal entity for the business that is separate from the business owner(s), meaning that the owner(s) are usually not personally liable for the company’s debts or lawsuits. Other common business entity structures such as corporation, general partnership, or sole proprietorship do not offer the same protections.
LLCs, which can be owned by one person (a single-member LLC) or more than one person (a multiple-member LLC), are essentially hybrid entities that combine the asset protection of a corporation with the flow-through taxation benefits of a partnership or sole proprietorship.
LTD stands for “limited,” and it’s a type of business incorporation used primarily in the UK, Canada, and Australia. When you see it — or “LTD” — as a suffix to an official company name, it indicates that it is a private “limited company.” That means that if anything happens to the company — like bankruptcy or getting sued, for example — then the investors are only responsible for the capital that they originally invested. This arrangement protects the personal assets of investors.
“Inc.” stands for “incorporated.” If you see it after the name of a company, it means that company is legally incorporated in at least one state. The founders have filled out all the paperwork, paid all the fees, and is viewed as a corporation by the government and the IRS.
“Corp” stands for “corporation.” If you see it after the name of a company, it means that company is legally incorporated in at least one state. The founders have filled out all the paperwork, paid all the fees, and is viewed as a Corporation by the government and the IRS.
An S Corp is a type of business corporation. An S Corp passes all their finances — corporate income, losses, deductions, and credits — through their shareholders. Because S Corp shareholders report the income and losses of the company on their own personal tax returns, the company isn’t subject to double taxation.
Like a C corps or an S corps, people are often referring to a “benefit corporation” when they say “B corp.” But B corp is actually different from a benefit corporation, although they’re related.
A benefit corporation is a type of formal legal business structure, like a C corp or S corp. In addition to making a profit, shareholders hold benefit corporations responsible to contributing in some way to the public good. In some states, benefit corporations are required to produce proof that they’re contributing to the public good. They’re taxed the same way as C corps, which means they’re subject to double taxation.
B Corp, on the other hand, is a certification that tells you something about the corporation. Think like the “USDA Organic” stamp or “Fair Trade.” It tells you that this company has undergone a more scrupulous process to make sure that it’s doing the good that it says it’s doing.
B Corp certification comes from a non-profit called B Lab. And while it used to be that any type of corporation could also become certified as a B corps, now B Lab requires that all Certified B Corps become benefit corporations if that option is available in their state.
“C corporation” or “C corp” stands for “corporation.” The “C” comes from the fact that C corp income is taxed under the subchapter C of the Internal Revenue Code. That’s the law that responsible for the double taxation that C corps are known for, which we’ll go into more below. C corps are the most common type of corporation in the United States, but they may or may not be the best options for your startup!
Corporations are a business entities that exist entirely separately from their owners. They can be taxed, make a profit, and be held liable. In fact, they offer the highest level of protection from personal liability for the owners.
A general partnership is a business agreement where two or more people (partners) agree to share all of the profits, liabilities, and assets of a business.
General partnerships don’t have any liability protection, so both partners are legally and financially liable for the actions of the other. That means, for example, that if one partner is sued by an upset client, then the other partner’s personal assets — like their home, car, savings, etc. — can be forfeited as payment.
In order to become a general partnership, you need at least two people who agree to take on each other’s liabilities. While oral agreements do count, it’s always a good idea to get everything written down and signed in an articles of partnership agreement. And when it comes to taxes, every partner pays their own taxes on their own personal income tax forms.
A limited partnership (LP) is a type of business partnership that has two types of partners — general and limited — and there are different liabilities for the two. In order to qualify as an LP, a business has to have at least one general partner and one limited partner.
General partners in an LP are personally liable for the business. Because the general partner of a business can be a person or an entity, many people choose to set up an LLC to act as the general partner, thereby avoiding personal liability. General partners are also involved the actual running of the business.
Limited partners, on the other hand, aren’t personally liable. Limited partners can’t contribute to the day-to-day operation of the business — their involvement is strictly monetary. In fact, if they’re found to be trying to influence how the business is run, they can be stripped of their protections and also held personally liable.
When it comes to taxes, LPs avoid the double taxation that some types of corporations are subject to. General partners pay self employment tax, while limited partners don’t pay self employment tax because they don’t actually run the business and therefore get their share of profits in dividends.
A limited liability partnership (LLP) is type of business structure in which all partners have limited liability for the business. That’s means they can’t be held personally liable if the company — or one of their partners — is sued.
In an LLP, all partners are allowed to participate in running the business. A company has to have at least two partners to become an LLP.
When it comes to taxes, LLPs avoid the double taxation that some types of corporations are subject to. In a partnership, the profits are taxed solely on the partners’ personal tax returns. In some other types of business formations, the profits are taxed first as corporate income tax and then the shareholders’ dividends are taxed on their personal tax returns. LLPs do, however, sometimes have to pay state franchise taxes.
Choosing the right type of business entity is tricky, but trust us — it’s not impossible. Consider three major factors when you’re choosing the right type of business for your startup: liability, taxes, and record-keeping. Each of our guides goes into the nitty-gritty of all three, which should help you make your decision.
And, if you can afford it, it never hurts to hire a lawyer who specializes in business entities to help you sort out the details. Remember: The type of business you choose affects a lot. So choose wisely.