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Let's look at how most businesses are set up. Sole proprietorship A sole proprietorship is easy to set up and gives you complete control over your business. You are automatically considered a sole proprietorship if you run a business but don't register as anything else. With a sole proprietorship, there is no separate business. This means that the assets and debts of your business are not separate from the assets and debts of your personal life. You could have to pay the business's debts and obligations out of your pocket. Sole proprietors are still able to get a trading name. It can also be hard to get money because you can't sell a stock, and banks don't like to lend to sole proprietorships. Sole proprietorships can be a good choice for low-risk businesses and business owners who want to try out their business idea before forming a more formal business. Partnership Partnerships are the simplest way for two or more people to own a business together. There are two common types of partnerships: limited partnerships (LP) and limited liability partnerships (LLP) (LLP). Only the general partner in a limited partnership is responsible for everything. The other partners only have to pay for what they do. A partnership agreement usually says that the partners with limited liability also have limited control over the business. Profits are passed through to personal tax returns, and the general partner, who doesn't have limited liability, must also pay self-employment taxes. Limited liability partnerships are like limited partnerships, but each owner only has to pay for their share of the business. With an LLP, each partner is protected from debts against the partnership. They won't have to pay for what other partners do. Partnerships are a good choice for businesses with multiple owners, professional groups (like a group of lawyers), and groups who want to test their business idea before forming a more formal business. Limited liability company (LLC) An LLC is a business structure that lets you get the best of a corporation and a partnership. LLCs protect you from personal liability. So, for example, if your LLC gets sued or goes bankrupt, your assets, such as your car, house, and savings accounts, won't be at risk. You can pass on profits and losses to your income without paying corporate taxes. On the other hand, members of an LLC are considered self-employed and must pay Medicare and Social Security taxes on their own income. In many states, LLCs can end before their time. When a member joins or leaves an LLC, some states may require that the LLC be dissolved and reformed with new members unless the LLC already has an agreement in place for buying, selling, and transferring ownership. LLCs can be a good choice for businesses with a medium or high risk, owners with a lot of personal assets they want to protect, or owners who want to pay less tax than they would with a corporation. Corporation C corp A corporation sometimes called a "C corp," is a separate legal entity from its owners. Corporations can make money, pay taxes, and be held legally responsible for their actions. Corporations protect their owners from personal liability the most, but it costs more to set up a corporation than other structures. This is because corporations must keep, run, and report on many more records and processes. Corporations have to pay income tax on their profits, while sole proprietors, partnerships, and LLCs don't have to. In some cases, corporate profits are taxed twice: once when the company makes a profit and again when dividends are paid to shareholders and reported on their tax returns. Corporations have lives that are entirely separate from the lives of their shareholders. So if a shareholder leaves the company or sells their shares, it doesn't affect how the C corp does business. Corporations have an advantage when it comes to getting money because they can sell stock to get money. This can also help them get people to work for them. Corporations can be a good choice for medium-risk or higher-risk businesses that need to raise money, plan to "go public," or sell in the future. S corp An S corporation, also called an S corp, is a particular type of corporation made to avoid the problem of being taxed twice that comes with regular C corps. Instead, S corps let owners pass on profits and some losses directly to their income without ever having to pay corporate tax rates. Not all states tax S corporations in the same way, but most do so in the same way as the federal government and tax the shareholders in the same way. Some states tax S corps on profits over a specific limit, while others don't recognize the S corp election and treat the business as a C corp. To get S corp status, an S corp must file with the IRS, which is different from registering with their state. S corps are limited in specific ways. Check the IRS website to see what you need to do to be eligible. Of course, you'll still have to follow a C corp's strict filing and running rules. Just like C corps, S corps have a life of their own. If a shareholder leaves the company or sells shares, it doesn't affect the S corp too much. S corps can be a good choice for businesses that would typically be C corps but meet the requirements to file as an S corps. B corp A benefit corporation, sometimes called a "B corp," is a for-profit business recognized by most U.S. states. The way B corps and C corps are taxed is the same, but their goals, accountability, and openness differ. Both mission and profit drive B corporations. Shareholders expect the company to do something good for the public in addition to making a profit. Some states ask B corps to show how they help the public good by submitting annual benefit reports. There are several third-party B corp certification services. Still, they are optional for a company to be legally considered a B corp in a state where that legal status is available. Close corporations Close corporations are like B corps, but their structure is less traditional. These get rid of many rules that usually apply to corporations rather than smaller businesses. Different states have different rules, but usually, the public can't buy or sell shares. However, a small group of shareholders can run a closed corporation without a board of directors. Nonprofit corporation Corporations that don't make money are set up to do nonprofit, educational, religious, literary, or scientific work. Nonprofits can get tax-exempt status if their work helps the public. This means they don't have to pay state or federal income taxes on any money they make. For tax exemption, nonprofits must file with the IRS, which is different from registering with their state. Administrative rules for a non-nonprofit C corp are very similar to those for a regular C corp. There are rules about what they can do with any money they make. They can't, for example, give profits to members or political campaigns. 501(c)(3) corporations are a common name for nonprofits. This is because this name comes from the part of the Internal Revenue Code that is most often used to give tax-exempt status. Cooperative A cooperative is a business or organization owned by the people who use its services and run for their benefit. The cooperative's profits and earnings are shared among its members, also called "user-owners." Usually, an elected board of directors and officers runs the cooperative, while regular members can vote to decide where the cooperative goes. Members can join the cooperative by buying shares, but the number of shares they own doesn't change how much their vote counts.