Business Structure Definition

Becoming a business owner means learning a lot of new terms and definitions. One example is the phrase “business structure.” The definition is simple enough. But understanding which of the possible business structures is best suited to you is more difficult to know. 

Your business’s structure has a huge impact on how your business runs from day to day and how it pays its taxes. The business structure you choose for your small business also determines your liability. 

As a small business owner, there are several major types of business structures that you need to be aware of. And you need to know not only each business structure’s main characteristics but also its advantages and drawbacks.

What is a business structure?

The simple definition of business structure is how the business is organized. A business structure also determines who receives the profits, how those profits are distributed, and which employees or members perform the various jobs associated with the business. 

Business Structure Examples

To fully understand the importance of a business structure, we should review several business structure examples. 

Corporations

Corporations are one of the most common business structures. Although most people have a basic understanding of corporations, not everyone understands that most corporations share several key characteristics. First, they offer limited liability to their owners. This means that the assets of the owners are generally separate from the business and cannot be used to satisfy the liability of the business. Next, corporations enjoy a unique kind of ownership structure where people can buy and sell shares of the company. 

Thanks to this simple system, corporations can easily obtain funding by issuing shares of stock. When corporations go public, people can use brokers on the stock market to buy and sell these shares. 

From a tax perspective, corporations are subject to two levels of taxation. The first level of tax is on the corporation itself. The second tax is levied on the business owners’ income. 

Finally, corporations are generally perpetual legal entities. Corporations are an ideal business structure for people who want to raise money easily and eventually “go public.”

Limited Liability Company (LLC)

An LLC offers many of the benefits of corporations. For instance, LLCs (like corporations) offer personal liability protection for their owners. However, LLCs cannot issue shares of stock. Instead, LLCs are managed by either their members or managers. 

Unlike corporations, LLCs do not need to pay corporate taxes. Instead, all profits and losses from an LLC “pass-through” to the individual members. The members then pay personal income taxes on their profits. 

LLCs are not necessarily perpetual entities. Depending on your state, LLCs have a limited lifespan. 

Sole proprietorships

Sole proprietors are the most simple business structure, as well as the default business structure. As the name suggests, there can only be one owner. Because every new business owner is automatically considered a sole proprietor, there’s no need to file any paperwork. 

Yet sole proprietorships are not viewed as separate entities from their owners. This means that your business’s assets and liabilities are intertwined with your personal assets and liabilities. This can place you—as the owner—in a very vulnerable legal position.

Because they are flexible and have no start-up costs, a sole proprietorship is a great business structure for when you are first starting your business journey. 

Business structure – advantages and disadvantages

Every business structure has at least one advantage and disadvantage. Determining whether one business structure is best for your business depends entirely on your goals and circumstances. 

Business structure – benefits

Each business structure carries its own advantages. LLCs offer lower taxes, limited liability, and a limited lifespan. Corporations also offer personal asset protection. Aside from that, corporations make it easy to raise capital and transfer ownership. And sole proprietorships are easy to start up and maintain. You don’t have to hassle with staying compliant, opening a separate business bank account, or paying your business’s taxes.

Business structure – disadvantages

Each business structure has its disadvantages. It can be difficult to transfer ownership with LLCs. Also, they can be subject to additional scrutiny from state and federal authorities. And you have to spend significant time and money making sure you’re compliant with state regulations. Corporations share several of these drawbacks. In addition, corporations are subject to two levels of taxation and need to follow formalities, like establishing a board of directors and having periodic meetings. Finally, sole proprietorships offer no protection to their owners’ assets. If a sole proprietorship faces a multi-million dollar lawsuit, then the owner may have to use their assets to satisfy any judgment. 

Summary

A business’s structure controls how it operates, who owns it, and how it pays taxes. Various business structures each have their benefits and drawbacks. Small business owners should carefully consider their goals before choosing a business structure. 

We Can Help

To guarantee success, you need to pick your business structure carefully. Once you’ve made your decision, we can get you started in a flash. In fact, we have products and services for almost every business need. We can help simplify the process of forming an LLC or corporation with our Business Formation Services. If you already have your own business, we can help keep you in good standing with our Worry-Free Compliance Service. We can even help you visualize and organize your business’s finances with ZenBusiness Money. The opportunities are endless. Let us help you today.