What is the Best Business Structure for Small Businesses?

Updated on 5 December 2023 11 min Read
Best Business Structure for Small Businesses

Are you trying to choose the best business structure for your business but still haven’t figured it out? Here are the best ideas to structure your business.

When you start your own business for the first time, deciding to give it a structure is one of the most important and impactful thoughts to have at that time. Picking any business structure without knowing your needs can result in your loss. Therefore, it is required that before you decide on the best business structure for your business, you need to gather all the necessary information about the business entities, and that can be quite challenging.

While deciding about your business structure, you have some choices which you can further think about and finally select one.

What is a Business Structure?

A business structure, also known as a business entity or a legal entity, is a legal classification that regulates different situations of your business. It is a type of setup a company should carry out its daily functioning smoothly and effectively. And on a federal level, business structure determines tax burden.

Why is a Business Structure Important?

Choosing the right business structure is very important from the start and is among the most crucial decisions one can make to give the right shape to their business. Here are some facts you can consider:

  • The business structure one chooses affects how much one will pay in Texas.
  • It determines their ability to raise money.
  • The paperwork which is needed to be filed
  • Choose a business structure for your business before registering it with the state.

Legal Options Available for Structuring a Small Business

When searching for the best business structure for your small business, you need to look for something legally preferable. The following are the business structure from which you can select one according to your needs:

1: Sole Proprietorship

A sole proprietorship, also known as a sole trader, is an unincorporated business where the one person who has funded the business is the sole owner, and no one else is there to claim it.

  • That sole owner has complete control over the entire business. This business structure is the easiest type of business for beginners who are newbies to the business field, as it lacks any government regulations.
  • It is very cost-effective, and the sole owner has all the rights while making any decision regarding the business.
  • It offers no legal separation between your business and your personal belongings.
  • Being an unincorporated business, the sole owner has to pay the income tax based on the profits earned from the business.
  • All profits directly go to the owner, and the owner, himself/herself, has to handle anything and everything when it comes to any tax liabilities.
  • There is less paperwork, no need to obtain an employer identification number from the IRS, and no need for a business checking account.
  • You may need to get a license permit with the help of a business lawyer, which also depends on the state and the business type.

Related: Myths and Facts About Starting an Online Business

2: Partnership

When two or more people plan to run a business together, a partnership business structure is one of the simplest and the best ways for them. It is also an unincorporated business, just like a sole proprietorship. In this business structure, each partner contributes the required money, manpower, resources, and skills based on their capabilities.

In a general partnership, the only thing required is a partnership agreement between each partner. The belongings of each partner are not protected as they may be used as collateral in court. The two common types of partnerships are:

Limited Partnership (LP)

In a limited partnership, only a single general partner has unlimited liability, while the others have limited liability. The general partner is highly involved in the day-to-day activities and all the team’s decisions, while the limited partners only help fund the startup of their business and are not involved with the day-to-day activities of their business.

Limited Liability Partnership (LLP)

It works in a pretty similar manner to the limited partnership. The prime difference is that each partner has limited liability under a limited liability partnership. It helps keep each owner’s personal and business finances separate, and their belongings are protected due to legal protection.

3: C Corporation

A C corporation, often referred to as C-corp, is a legal business structure that offers the most protected business to the owners of the company. Still, at the same time, it is also one of the most expensive business structures that you can think to establish.

  • Paperworks are quite complicated than they are in other business structures.
  • In this business structure, there is a double taxation system; the owners have to pay tax personally apart from the business tax.
  • Has to pay taxes before distributing the company’s profits among the business partners.
  • It is required for this corporation to hold a meeting at least once each year.
  • Further, C corpo is required to file some documents like; annual reports, financial statements, and disclosure reports.

4: S Corporation

S corporations are similar to C corporations, but S corp have a significant difference. S corp is a type of business structure where all the profits, losses, and deductions pass through the personal accounts of the shareholders for tax liability purposes (to get reported on individual income tax), which helps avoid the double taxation system strictly followed in C corp.

Even though this business structure is quite appealing, the answer to why don’t more and more business owners select this business structure over the C corporation structure is that IRS has some strict guidelines that must be followed to get S corporation status are:

  • The business must be owned by US citizens.
  • Should not have more than 100 business partners, etc.

5: B Corporation

If you are planning to start a business while keeping the benefit of the public in mind, getting registered with B Corporation is the best way to do that. B Corp, also known as B lab, has similar functions as C Corp; this structure is known for potential cost savings and for encouraging social responsibility. Starting a B corp, which is a for-profit corporation, comes with some advantages, but only if your state offers this certification process. Some of the top advantages are:

B Corp Encourages Social Responsibility

When you have a B Corp business structure, you have a social responsibility, and consumers get too much interested in those companies that put their efforts into society and the environment. By following the B corp standards, it becomes evident to the consumers how your company is making a difference and encourages them to support your business.

It will Attract Talented Employees

When you and your company are actively trying to positively impact society, it will attract talented job seekers looking for something like this in their careers. It will help you retain top talented employees.

It’s Cost Savings

If you want to save your company’s money in the long run, then registering as a B corp can be wise. It will help you learn the affordable means to be sustainable, and the certification process will help your company to identify unwanted spending.

5: Business Hosting

A service that allows you and your business to make your company’s websites accessible online is known as business hosting. When you use it for your small business purpose, it is known as small business hosting. The website you are using should be adequately hosted to maintain and protect it, and to manage that; it is essential to appoint an expert in this technical field.

While choosing the web hosting provider from the market, try to find the best option, as it can be a bit challenging for you to choose a reliable one from the many available options. If you choose a cheap option, you have to compromise with the technical support you will get from the web hosting provider. Once you choose a reliable & affordable web hosting service, you won’t have to be worried about switching provider, and it will save you time and money.

Using small business hosting services is profitable with a good business plan. The plan should be where the web hosting provider will allow you to enjoy strong security with the help of more advanced tools and the availability of technical support with good experience who can tackle your security concerns.

Benefits of Having a Business Structure

Once your business gets registered with the federal, it has many advantages. A business structure has several benefits, including limited personal liability, ease of hiring skilled manpower, enhanced credibility, and brand awareness.

It Will Reduce Your Liability

When you have a business structure for your business, it’s the best way to protect your belongings from your business actions.

On registering your business, your company becomes a legal entity, and it becomes responsible for the debts that arise due to business, which means the lender of your company can get payments only from the business assets and not from the personal assets of the owners and shareholders.

Ease in Hiring Skilled Manpower

If you wish to hire skilled manpower for your company, you need to register your business with the U.S. States before you start recruiting talented workers for your business. A registered business owner can recruit full-time employees and pay them as mentioned in the State laws.

On registering your business, you will obtain a State Identification Number(SIN), which will provide your employees with necessary health benefits; after including some other benefits, it will make your company an attractive hub for talented and skilled workers, and then only you will be able to hire them easily.

Related: Why Do You Need A Website For Small Business?

Frequently Asked Questions Regarding Business Structure

What Is a Business Entity?

A business entity, another name for business structures, is an organization that one or more people form to run their business activities, and it is a type of setup a company should carry out its daily functioning smoothly and effectively.

Which Business Structure Provides the Best Protection for Your Business?

Corporations are one of the best business structures that provides the strongest protection to business owners from personal liabilities. The cost to form this business structure is the highest among other structures.

Which Business Structure Is Right for You?

The right business structure for you completely depends on your business itself and your expectations, whether you want to grow your business in the future or want it to be the same. Generally, for beginners, sole proprietorship is a good option to consider.

Which Business Structure Is the Easiest for New Business Owners?

The sole proprietorship is considered the easiest business structure for new or small business owners because it is very cost-effective, and the one who has founded the business remains the sole owner of the entire business and has to pay personal income tax on profits earned from the business.

What Is a Nonprofit Corporation?

Nonprofit corporations, also known as non-business entities, are those corporations that focus on the public or social benefits and work for social welfare, charity, or social development.

The biggest benefit while choosing this form of corporation is that there is no need to pay any government taxes or real estate taxes on any kind of income the corporation gets. It can get donation money from any person who is voluntarily willing to donate.

Conclusion

While searching for a business structure, it is very important to choose the right business structure for your small company, as it is a very crucial decision to make. You must do proper research before you finally select one, and that too only after knowing all your needs. It has long-lasting consequences, as it will be the deciding factor for the future in terms of management, legal, and tax issues, etc.

You can choose from several business structures, including sole proprietorship, partnership, C Corporation, S Corporation, B Corporation, Small Business Hosting, etc. Each business structure has its pros and cons, so while choosing the structure, keep your priorities in mind. Choose wisely, your one decision can either do your business or it can break it as well.

The Author

Virat Agarwal is a highly skilled legal content writer with a passion for crafting compelling and informative articles that educate and engage her readers. With a strong and extensive experience in writing, he has the ability to simplify complex concepts into easy-to-understand language.