The Five Types of Business Structures

by Robert Vaux; Reviewed by Jayne Thompson, LLB, LLM; Updated January 29, 2019

All businesses, large and small, fall into one of five basic structures that define how it is organized, how it operates and how it handles things such as taxes and liability. Each structure contains its own benefits and drawbacks, and what works for one company may prove disastrous to another. Learning the differences between business structures can help an entrepreneur plan his company.


  • Small businesses can choose to organize as a sole proprietorship, partnership, corporation, S corporation or limited liability company.

Ins and Outs of Sole Proprietorship

A sole proprietorship is an unincorporated company owned (and often operated) by a single individual. It can include small retail stores, mechanic services and even inventors or musicians seeking to sell their products online. It is fairly easy to establish a sole proprietorship, and the process of running them is fairly simple. However, a sole proprietorship cannot sell interests in its business to raise money, and the owner is liable for all of the debts and legal suits of the business.

Coming Together in Partnership

A partnership is similar to sole proprietorship, except more than one person is involved. Two or more people come together to work at a given business and share in the profits (or losses) or that business. Like sole proprietorship, a partnership is relatively easy to set up and doesn’t have to pay the sort of taxes that larger corporations do. However, the partners themselves are responsible for business losses and liabilities, and partnerships founded on informal agreements may run into interpersonal problems when the company struggles.

Raise Funds More Easily as a Corporation

A corporation is company controlled by a group of people who own shares in the company’s ownership. The shareholders dictate who runs the company and how it conducts business, then receive profits based on the shares of stock that they own.

Corporations can raise funds more easily and readily than partnerships and sole proprietorships and often have access to more starting capital to boot. They exist separately from the people working for them, which means that the owners need not worry about personal liability, and that the company continues even after the founders have retired.

On the other hand, corporations require input from many people, often making them slow to act, and must adhere to certain organizational standards such as annual shareholders meetings. They also tend to pay more taxes and similar fees.

Shareholders Rule in S Corporations

S Corporations are slightly different versions of standard corporations. Unlike other corporations, they pass all profits, losses and tax deductions to their shareholders, rather than absorbing them as their own entity. The shareholders declare all earnings on their personal tax returns rather than reflecting them through the company.

In order to do this, they must be based in the United States, they must have 100 shareholders or fewer, and those shareholders must be American individuals, trusts and estates rather than other companies (or foreign shareholders).

Limit Your Liability With an LLC

Limited Liability Companies first arose in 1977, making them a comparatively recent phenomenon. LLCs combine the elements of a corporation with those of a partnership or solely owned business. Like corporations, the owners are not personally responsible for debts and other liabilities. Like partnerships and sole proprietorships, they are comparatively simple and allow for quick operation. Because they are comparatively new, fewer legal precedents control their actions, which may create unanticipated problems in their operation.

bibliography-icon icon for annotation tool Cite this Article