Business Ownership Structures

Learn about the pros and cons of the corporation, LLC, partnership, sole proprietorship and other business structures.

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Before you can decide how you want to structure your business, you'll need to know what your options are. Here's a brief rundown on the most common ways to organize a business:

Sole Proprietorships

A sole proprietorship is a one-person business that is not registered with the state like a limited liability company (LLC) or corporation. You don't have to do anything special or file any papers to set up a sole proprietorship -- you create one just by going into business for yourself.

Legally, a sole proprietorship is inseparable from its owner -- the business and the owner are one and the same. This means the owner of the business reports business income and losses on his or her personal tax return and is personally liable for any business-related obligations, such as debts or court judgments.

Sole proprietorships make sense in a business where personal liability isn't a big worry -- for example, a small service business in which you are unlikely to be sued and for which you won't be borrowing much money for inventory or other costs.

Pros of Sole Proprietorships

  • no formation paperwork or fees
  • complete control over your business, and
  • you receive 100% of the profits.

Cons of Sole Proprietorships

  • no limited liability protection, and
  • unlikely investors will provide funding.


Similarly, a partnership is simply a business owned by two or more people that hasn't filed papers to become a corporation or a limited liability company (LLC). You don't have to file any paperwork to form a partnership -- the arrangement begins as soon as you start a business with another person. As in a sole proprietorship, the partnership's owners pay taxes on their share of the business income on their personal tax returns and they are each personally liable for the entire amount of any business debts and claims. Both sole proprietors and partners in a partnership may qualify for the 20% pass-through tax deduction established by the Tax Cuts and Jobs Act (TCJA). See The 20% Pass-Through Tax Deduction for Business Owners for more information.

Like sole proprietorships, partnerships make sense in a business where personal liability isn't a big worry.

Pros of Partnerships

  • no formation paperwork or fees, and
  • pass-through taxation.

Cons of Partnerships

  • no limited liability protection
  • liability for the actions of partners, and
  • sharing profits and decision-making.

Limited Partnerships

Limited partnerships are costly and complicated to set up and run, and are not recommended for the average small business owner. Limited partnerships are usually created by one person or company (the "general partner"), who will solicit investments from others (the "limited partners").

The general partner controls the limited partnership's day-to-day operations and is personally liable for business debts (unless the general partner is a corporation or an LLC). Limited partners have minimal control over daily business decisions or operations and, in return, they are not personally liable for business debts or claims. Consult a limited partnership expert if you're interested in creating this type of business.

Pros of Limited Partnerships

  • the entity is attractive to investors
  • limited partners enjoy limited liability, and
  • pass-through taxation.

Cons of Limited Partnerships

  • general partners do not have liability protection
  • potential for conflicts among partners, and
  • you must file formation paperwork and pay filing fees.

Limited Liability Companies (LLC)

Forming and operating an LLC is a bit more complicated and costly, but well worth the trouble for some small businesses. The main benefit of an LLC is that the structure limits the owners' personal liability for business debts and court judgments against the business.

LLCs provide limited personal liability for business debts and claims. But when it comes to taxes, LLCs are more like partnerships: the owners of an LLC pay taxes on their shares of the business income on their personal tax returns.

LLCs make sense for business owners who either (1) run a risk of being sued by customers or of piling up a lot of business debts, or (2) have substantial personal assets they want to protect from business creditors.

Pros of LLCs

  • limited liability for all owners
  • simple and inexpensive to form (compared to corporations), and
  • flexible management and ownership structure.

Cons of LLCs

  • you might be responsible for state franchise tax, and
  • you must file formation paperwork and pay filing fees.


Like an LLC, forming and operating a corporation is a bit more complicated and costly, but the structure limits the owners' personal liability for business debts and court judgments against the business.

What sets the corporation apart from all other types of businesses is that a corporation is an independent legal and tax entity, separate from the people who own, control and manage it. Because of this separate status, the owners of a corporation don't use their personal tax returns to pay tax on corporate profits -- the corporation itself pays these taxes. The TCJA established a single flat tax rate of 21% for corporations, significantly lower than the 15% to 35% rate that corporations paid under prior law. Owners pay personal income tax only on the money they draw from the corporation in the form of salaries, bonuses, and the like.

Corporations make sense for business owners who either (1) run a risk of being sued by customers or of piling up a lot of business debts, or (2) have substantial personal assets they want to protect from business creditors.

Pros of Corporations

  • the entity is an ideal business structure for investors
  • you can easily transfer ownership, and
  • directors and shareholders have limited liability.

Cons of Corporations

  • corporations are expensive to form and maintain
  • you will face filing fees, annual fees, and additional taxes, and
  • corporate formalities (such as board meetings and record-keeping).

Nonprofit Corporations

A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, literary, or scientific purpose. A nonprofit can raise much-needed funds by soliciting public and private grant money and donations from individuals and companies. The federal and state governments do not generally tax nonprofit corporations on money they take in that is related to their nonprofit purpose, because of the benefits they contribute to society. To learn more about nonprofit corporations, see Nonprofit Basics.

Pros of Nonprofit Corporations

  • furthering a charitable mission
  • eligibility for tax-exempt status, and
  • attractive for donors and volunteers.

Cons of Nonprofit Corporations

  • you must comply with nonprofit laws and follow corporate formalities, and
  • profits must be used to further the mission.


Some people dream of forming a business of true equals -- an organization owned and operated democratically by its members. These grassroots business organizers often refer to their businesses as a "group," "collective," or "co-op" -- but these are often informal rather than legal labels. For example, a consumer co-op could be formed to run a food store, a bookstore, or any other retail business. Or a workers' co-op could be created to manufacture and sell arts and crafts. Most states do have specific laws dealing with the set-up of cooperatives, and in some states you can file paperwork with the secretary of state's office to have your cooperative formally recognized by the state. Check with your secretary of state's office for more information.

Pros of Cooperatives

  • the entity is attractive to employees and customers, and
  • funding opportunities (such as grants).

Cons of Cooperatives

  • the entity is not available in every state
  • not every type of business can form a cooperative, and
  • less profit for owners.

More Information

For more online guidance on deciding which ownership structure is most suitable for your business, see Choosing the Best Ownership Structure for Your Business.

You may want to also read LLC or Corporation? How to Choose the Right Form for Your Business, by Anthony Mancuso (Nolo).

Find the business structure that fits your business. Take our business formation quiz for help deciding the best structure for your business.
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