When you’re starting a business, its legal structure will impact everything from taxation to liability protection to how you can—or can’t—end up in court.
Although there isn’t a universal “best” type of corporation or business structure, there’s probably a best type for you and your business. Here, learn the various ways to structure a company, the benefits of each, and what to consider when choosing a business or corporation type.
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Types of corporations and business structures
Here are seven common types of corporations and business structures. Although they’re not all corporations, some of the details overlap. For instance, while an LLC isn’t strictly a corporation, it can elect to be taxed as one, making it a corporation for tax purposes.
- Sole proprietorships
- Limited liability companies (LLCs)
- S corporations
- C corporations
- Nonprofits
- Partnerships
- Joint ventures (JVs)
1. Sole proprietorships
Sole proprietorships are the simplest business structure because they don’t distinguish between the business and the person behind it, meaning the owner assumes full personal liability for business debts and obligations.
Since sole proprietor is the IRS’s default setting for single-owner businesses, you needn’t file any paperwork to become one—it’s automatic. That said, if you operate your business under a name other than yours, you must file a “doing business as” (DBA) form.
Sole proprietors can hire staff but are still liable for all business operations, including those performed by employees or contractors. Sole proprietors are also responsible for paying their own self-employment taxes.
Examples of sole proprietorships
Freelancers, independent contractors, and gig workers (e.g., consultants, delivery drivers, dog walkers, tutors) typically operate as sole proprietors unless they formally incorporate.
2. Limited liability companies (LLCs)
A limited liability company (LLC) protects its owners (known as “members”) from being financially liable for most business debts and damages, protecting their personal assets. Although an LLC isn’t technically a corporation, it can be taxed as one.
LLCs offer flexibility compared with other business entity types. There’s no limit to the number of members in an LLC, which can be operated by a single owner, a 50/50 partnership, or even a board of directors. Taxation is flexible, too. The default option for LLCs is taxation as a pass-through entity (meaning business profits and their tax burdens get passed onto members’ personal incomes rather than being “double taxed” at the company level and again on personal income). However, LLCs can choose what makes sense for their business model and be taxed as partnerships or corporations.
Laws vary by state. See these state-specific guides for direction on starting an LLC in your region:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Examples of LLCs
The flexibility and relative ease of running an LLC makes them popular with a variety of businesses. Online mattress company Lull is an LLC, and after restructuring in 2017, so is Google.
3. S corporations
Instead of owners or members, S corps have (up to 100) shareholders, who report the company’s corporate profits, losses, credits, and deductions on their personal taxes. The S corp only pays federal corporate taxes if it earns more than 25% of its gross receipts from passive income sources, such as royalties, dividends, and earned interest.
Unlike other pass-through entities like general partnerships and sole proprietorships, S corps can pay salaries to shareholders who are active company employees. However, they must pay payroll taxes (such as Medicare and Social Security) on such distributions rather than passing the credits onto shareholders’ personal tax returns.
While the tax benefits of operating as an S corp are clear, it’s worth noting that tax authorities like the IRS tend to scrutinize them—mainly because of the many tax loopholes associated with S corporations.
Examples of S corps
It’s difficult to discern whether a corporation is an S corp or a C corp without checking its tax filings. However, since the IRS limits S corps to a maximum of 100 shareholders, the designation suits small businesses.
4. C corporations
C corporations, or C corps, can have as many shareholders as they’d like, but they must maintain a board of directors responsible for core company decisions. C corps are subject to double taxation, i.e., they pay tax on corporate income, and their shareholders pay taxes on distributions. With unlimited shareholders, a C corp offers unparalleled growth potential and may be suitable if you plan to grow your small business and eventually sell it. The cost of that potential comes on tax day.
Examples of C corps
C corporations are complex and tend to represent large companies and brands. Apple, Microsoft, Walmart, and Johnson & Johnson are all C corps.
5. Nonprofits
As the name suggests, nonprofit corporationsgenerate no profit. Otherwise, they’re structured similarly to other corporations: A board of directors generally runs nonprofits, and donors might oversee some company operations (similar to how shareholders fund corporations and have some control over the company—though shareholders have ownership while donors do not).
Because of their public-service missions, nonprofits are tax exempt. They can also receive donations from various funding sources, including private donors, for-profit corporations, and government grants.
Examples of nonprofits
Dwell With Dignity is a non-profit organization that helps people in need access resources to furnish their homes. Another example of a non-profit organization operating on Shopify is Provision Promise. It provides dental hygiene products to those in need.
6. Partnerships
Partnerships come in three primary business structures: general partnerships, joint ventures, and limited liability partnerships (LLPs).
- General partnership. General partnerships are like sole proprietorships in that the partners assume personal liability for business operations. Even if you elect to form another business entity, like an LLC or S corporation, your business will revert to a default partnership unless you and your partners comply with applicable regulations. If this happens, it may eliminate the liability shield provided by an LLC.
- Limited liability partnership. An LLP is a business entity that protects partners from personal liability. Unlike a general partnership, a partner in an LLP doesn’t assume liability for the torts (illegal activities) of other partners, employees, or the partnership itself. The exception to this rule is when a partner offers certain professional services, such as legal or medical advice, in which case the partner assumes liability for both their own actions and anyone they're supervising or working with.
Examples of partnerships
Many service-based physical businesses are partnerships—organizations like healthcare offices, law firms, marketing and creative agencies, etc.
7. Joint ventures (JVs)
Joint ventures are similar to general partnerships, except in scope and duration.
While general partnerships are typically intended to operate indefinitely, joint ventures are generally temporary. Either way, all partners assume full personal liability for business operations and partner and employee conduct.
Examples of JVs
Bottled beverage maker North American Coffee Partnership is a joint venture between Starbucks and PepsiCo. Video streaming service Hulu started as a joint venture between News Corp. and NBC Universal. Now, Walt Disney has jumped in, too.
Considerations when choosing a corporation type
Naming and DBA
Regardless of company structure, all businesses must register a name; companies often choose one that reflects their products, services, location, or other important details. Unless you file a “doing business as” or DBA, your sole proprietorship or partnership’s default name will be the same as its owner or owners’ legal name(s).
Your small business’s initial name might not work for the long term. Filing a DBA lets you do business with a name different from the company’s legal or “true” name. For example, a law firm LLP initially incorporated as Jones & Associates could file a DBA to indicate its field of specialty: Jones & Associates Personal Injury Attorneys.
To file a DBA, you must complete and file the appropriate forms and pay a filing fee to the office of your state’s secretary of state.
State of incorporation
Small business owners in the US can incorporate in any of the 50 states. Where you incorporate will dictate several essential details, such as the laws your business must follow, how it is taxed, and how it manages lawsuits.
Which state is the best one to incorporate in? Here are some variables to consider:
- Geographical convenience: Is the state of incorporation easy to get to?
- Minimum owners: Some states require a certain number of people to establish a business.
- Tax structure: How much does the state levy in annual corporate franchise tax? Will income your business earns elsewhere be subject to taxes in the state of incorporation?
- Records: Some states require storing records within state lines.
- Banking: Some states require you to keep a corporate bank account within the state of incorporation.
Special requirements for special fields
Some professions requiring special certification or licenses—such as medical or legal practices—face limits on the types of business their practitioners can form. Depending on the state of incorporation, they may have to come together as a professional corporation or professional services corporation, which allows licensed professionals to benefit from the liability protections of traditional corporate structures, excluding malpractice claims.
Professional services corporations get taxed like C corps, subject to corporate tax and tax on shareholder distributions.
In states such as California and Virginia, professionals can organize into limited liability partnerships (LLPs) or LLCs instead. The main difference between an LLP/LLC model and a professional services corporation is that the latter must pay income taxes on the company itself, like a C corp, whereas LLP and LLC members pay taxes on income they receive.
Occupations covered by these state mandates may include:
- Lawyers (some states bar lawyers from forming LLCs)
- Accountants
- Health care professionals
- Engineers and architects
How your corporate type affects your business
Your company’s business structure dictates its legal responsibilities, tax liabilities, operational requirements, and fundraising capacities.
Partnerships and sole proprietorships tend to provide owners more control but don’t protect them against personal liabilities. S corporations offer a pass-through tax structure but limit fundraising capacity by restricting the number of shareholders. C corporations face more regulatory stipulations but fewer limits to raising capital. LLCs combine features of partnerships and corporations, while nonprofits can have a variety of tax treatments.
Professional advice can help you choose the right business structure for your venture. Regardless, it’s important to consider your business’s goals and operations before deciding.
How to incorporate
How you incorporate depends on your jurisdiction corporation type, and your business’s needs. A legal or business professional can help you determine the specifics.
Here are the general steps for incorporating your business:
- Choose a business name: Select a unique name that complies with your jurisdiction’s rules and check for its availability.
- Select a type of corporation: Decide whether you want to form a C corporation, S corporation, or other business type, depending on your needs.
- Choose a location: Determine the state or jurisdiction where you want to incorporate. Different states have different laws, fees, and benefits.
- Appoint a registered agent: Choose an individual or company responsible for receiving legal papers on behalf of your corporation.
- File articles of incorporation: Prepare and submit the necessary documents to the relevant state agency. Typical information includes the business’s name, purpose, number of shares authorized, and the registered agent’s information.
- Create corporate bylaws: Draft bylaws to outline the internal rules and procedures for the corporation, including information about shareholder meetings, the board of directors, and officers.
- Hold initial board meeting: Have an organizational meeting to adopt bylaws, appoint officers, and address other initial matters.
- Get necessary permits and licenses: Apply for required federal, state, and local business licenses and permits.
- Register for state and federal taxes: Obtain an employer identification number (EIN) from the IRS and set up state tax accounts if required.
Bring your corporation to life with Shopify
Regardless of your business structure, Shopify ensures you have all the tools to manage your business at every stage. You can launch as a sole proprietor and grow into an LLC or even a C corp or S corp, running everything from a single source of truth.
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Types of corporations FAQ
What are the seven common business structures?
The seven common business structures are:
- Sole proprietorships
- Limited liability companies (LLCs)
- S corps
- C corps
- Nonprofits
- Partnerships
- Joint ventures (JVs)
What is structure in business?
A business structure is an organization’s system of authority, communication, rights, and duties. It defines how tasks are divided, responsibilities are assigned, and decisions are made. An effective business structure helps employees understand their roles and responsibilities and how they fit into the organization while helping the company achieve its goals.
What are the four types of LLCs?
The four types of LLCs include:
- Single-member LLCs
- Multi-member LLCs
- Series LLCs
- Professional LLCs
How do I restructure my business to a different type?
To restructure your business from one type to another, follow these steps:
- Research and understand the legal requirements for restructuring.
- Seek advice from a lawyer, accountant, or business consultant.
- File necessary documents—such as articles of incorporation, amendments, or dissolution papers—with government agencies.
- Update existing licenses and permits or apply for new ones aligned with the new structure.
- Inform employees, investors, customers, and partners about the change to ensure a smooth transition.
Which type of corporation is best for my business?
The best type of corporation for your business depends on several factors, including your goals, industry, and financial situation. A sole proprietorship could be ideal if you’re just starting out, while an LLC or a C corp might make more sense once you’re more established or have growth goals.
What are some examples of corporations?
Shopify, Walmart, Coca-Cola, and Apple are all corporations.