In general, and in choosing the best business structure for a small business, there are three main types of business structures: sole proprietorship, partnership, and corporation. Each of them has distinctive features and offers different tax benefits to the business. We strongly recommend that you consult with a legal professional before choosing a structure for your small business.

Sole Proprietorship

Sole proprietorships are the most common form of business structure in the United States. They are also the simplest to administer, as they require only one owner. A sole proprietorship is not a separate legal entity and its income flows directly to the owner. 

This means that owners do not have to pay any taxes on the profits they make from their businesses, as taxes are calculated on personal income tax returns. However, because sole proprietorships do not have a separate legal status, they can be subject to some personal liability issues.

Partnership

Small businesses that have more than one owner usually form partnerships instead of corporations or LLCs. Partnerships are typically used by large companies that operate across multiple locations, but smaller businesses can also benefit from this structure by giving them more flexibility and reducing their overall costs. 

Partnerships are generally treated as pass-through entities for tax purposes so profits and losses flow through directly to the owners’ income tax returns.

Corporation

Corporations are separate legal entities created by state law to conduct business. They offer limited liability protection to their owners and can issue stock to raise capital from outside investors or sell shares in exchange for loans from banks or other lenders. Corporations can be organized as S corporations or C corporations, with S corporations being pass-through entities for tax purposes and C corporations subjecting shareholders to double taxation (once at the corporate level and again at the individual level).

Corporate Tax and S Corporation Tax

C corporations are subject to double taxation. For instance, as they should pay taxes on the profits they make; and then the shareholders are taxed again when they receive dividends from their shares. This is why many small businesses prefer to organize themselves as pass-through entities. 

S corporations avoid double taxation by having income and losses flow through directly to the shareholders. 

LLCs and Partnerships

Limited liability companies (LLCs) and partnerships also avoid double taxation by offering pass-through tax treatment. They have a similar structure to sole proprietorships in that they do not have a separate legal status but can still be subject to some personal liability issues. 

Sole Proprietorship vs. Partnership vs. Corporation

There is no one-size-fits-all business structure for every small business, as each type has its advantages and disadvantages. It ultimately depends on how much capital your business needs, whether you want limited liability protection, how you want your business to be taxed, what kind of regulatory framework your business operates under, etc.  

In Conclusion

In summary, sole proprietorships, partnerships, and corporations are the main business structures that small businesses use in the United States. They are also the main entities that you will encounter when searching for accounting and financial services.