Guide to Business Structures: Types and Their Advantages

When starting a business, one of the first legal decisions you’ll need to make is choosing a business structure. There are several common legal structures businesses can take, each with its own pros and cons. In this blog, we’ll go over the main types of business structures and the advantages of each to help you determine the best fit for your company.

The five primary legal structures for businesses are sole proprietorship, partnership, corporation, limited liability company (LLC), and S corporation. Let’s explore each one in more detail.

Sole Proprietorship

The simplest business structure is a sole proprietorship. This is when an individual starts and owns a business by themselves. There is no legal distinction between the business and the owner under a sole proprietorship. The owner has complete control over the company and keeps all profits.

However, they also have unlimited liability. This means the owner is personally responsible for all financial and legal debts and obligations incurred by the business. Sole proprietors must also fulfill all licensing and permit requirements on their own.

The advantages of a sole proprietorship lie in its simplicity. They are easy and inexpensive to form, requiring no special registration apart from licenses and permits. The owner enjoys full control and the profits flow directly to them. Taxes are simple as the business income is reported on the owner’s personal returns.


When two or more people start a business together, they can structure it as a partnership. Partners share control of the company based on their partnership agreement which details each partner’s rights, responsibilities, and percentage of ownership.

Profits and losses pass through the business to the individual partners based on their ownership share. Each partner then reports this income on their personal tax return. Similar to a sole proprietorship, the partners have unlimited personal liability for the business’s debts and obligations.

Partnerships must be registered with the state by filing a partnership agreement. This makes the business a legal entity separate from the individual partners.

Forming a partnership has several advantages. It’s easier to raise funds and manage a company with multiple partners. Different partners can also contribute specialized skills and expertise. This diversity can benefit the business.


A corporation is considered a legal entity completely separate from its owners. Owners, called shareholders, have limited liability for business losses and debts based on the amount they invested.

Corporations have complex regulations and legal formalities like appointed directors, regular shareholder meetings, and extensive record keeping. Corporations can sell stock to raise investment funds easily. Shareholders can transfer ownership of their shares.

The advantages of a corporation include limited liability, ability to raise funds through selling stock, and perpetual existence meaning it continues on despite changes to shareholders. The downside is the extensive legal formalities.

S Corporation

An S corp is a special tax status elected by qualifying corporations. Pass-through taxation to shareholders like an LLC. Shareholders have limited liability.

Advantages: Pass-through taxation, limited liability, perpetual existence

Limited Liability Company (LLC)

An LLC is a hybrid business structure combining aspects of corporations and partnerships. LLC members enjoy limited personal liability like shareholders in a corporation. Profits and losses pass through to members similar to a partnership.

Compared to corporations, LLCs are subject to fewer regulations and corporate formalities. There is more flexibility in company structure and management.

The advantages of an LLC are limited liability for owners, pass-through taxation so profits are only taxed once, and fewer legal formalities. However, they can be more complex than a sole proprietorship or partnership.

Choosing the ideal business structure involves weighing the advantages and disadvantages of each. Factors like liability, number of owners, regulations, taxes, and ease of formation should be considered. Talking to business advisors can help ensure you pick the structure that fits your objectives and situation best.

Every business structure has its own set of pros and cons. Sole proprietorships offer control and simple taxes but unlimited liability. Partnerships provide asset pooling and specialized expertise while still having personal liability. Corporations limit liability but involve extensive formalities. LLCs blend elements of corporations and partnerships for flexibility.

Carefully thinking through your specific needs will lead you to the ideal legal structure.