How Incorporation Works

Common Types of Businesses

A business can be structured in a few different ways. We'll cover the five most common: sole proprietorships, partnerships, limited-liability companies, corporations and S corporations. Each structure comes with its own set of requirements and procedures and will appeal to different types of business owners, depending on their needs and expectations.

Sole proprietorship: A sole proprietorship is a business that's owned by a single individual. These operations are often smaller in scale than other types of businesses. They're frequently the easiest to get off the ground because there tends to be less paperwork and associated fees involved. A sole proprietor operates a business that isn't incorporated.

Partnership: A partnership is a business that is owned by two or more individuals. Several types of partnerships exist, but in the most basic form of partnership – known as a general partnership – all partners split everything evenly, both profits and losses. Members of a partnership also aren't incorporated.

Limited-liability company: A limited-liability company – or LLC – is more closely related to a corporation than the other business types. It offers greater liability protection than a sole proprietorship or a partnership, but doesn't have all of the requirements of a corporation. The owners of the LLC are referred to as members; and, as the name implies, an LLC limits the amount of liability that the owner can incur with regard to debt or other decisions made by the members.

Corporation: A corporation is a more complex business structure that, once established, is considered to be an entirely separate entity. The owners of a corporation are referred to as shareholders. They in turn elect a board of directors to run the company. Because a corporation is considered to be a separate entity, it can switch owners many times without causing the corporation to cease to exist.

S corporation: An S corporation is similar to a standard corporation, but lacks some of the requirements of a corporation. The main difference between the two is that while a corporation is taxed as a separate entity, the shareholders of an S corporation are taxed individually. With a standard corporation, the corporation is taxed and then the dividend earnings of the shareholders are taxed, a practice known as "double taxation." The creation of an S corporation eliminates this.