Are You a Legal Professional?

Benefits and Drawbacks of Different Types of Business Entities

When you start your business, you will have to decide on which type of business entity you will be: sole proprietorship, partnership, limited liability company (LLC), corporation, or nonprofit. The type of business structure you choose will depend on several factors, including the nature of the workforce within your organization, the goal of the company, and so on. Each legal structure for business entities has its advantages and disadvantages, so it's best to eliminate the ones that simply wouldn't fit with your organization before choosing.

Some of the main benefits and drawbacks of different types of business entities, or legal structures, are listed below:

  Main Advantages Main Disadvantages
Sole Proprietorship
  • Easy to create and maintain
  • Business and owner are legally the same entity
  • No fees associated with the creation of the business entity
  • Owner may deduct a net business loss from personal income taxes
  • Owner is personally liable for any debts, judgments or other liabilities of the business
  • Owner must pay personal income taxes for all net business profits
General Partnership
  • Easy to create and maintain
  • No fees associated with creation of the business entity
  • Owners may report their share of net business losses on personal income taxes
  • All owners are jointly and personally liable for any debts, judgments or other liabilities of the business
  • Owners must pay personal income taxes for all net business profits
Limited Partnership
  • Easy to attract investors as they are only liable for their total amount of their investment into the business
  • The limited partners enjoy limited liability for any debts, judgments or other liabilities of the business
  • The general partners are more free to focus their attention on the business
  • General partners are able to raise cash without diminishing their control of the business
  • Limited partners can leave the business without dissolving the limited partnership
  • General partners are jointly and personally liable for any debts, judgments or other liabilities of the business
  • Can be more expensive to create than a general partnership
  • Mainly suited to businesses such as real estate investment groups or in the film industry
Regular Corporation
  • Owners of the business enjoy limited liability for the business' debts, judgments and other liabilities
  • Some benefits may be deducted as business expenses
  • With good accounting, owners and business may be able to pay lower taxes by splitting the business profits among owners
  • More expensive to establish than a sole proprietorship or partnership
  • Complicated paperwork that must be filed with the secretary of state
  • Corporation must pay its own taxes as a separate tax entity
S Corporation
  • Owners of the business enjoy limited liability for the business' debts, judgments and other liabilities
  • Owners share the net profits of the business and report their share on personal income taxes
  • Owners share the net business loss and can offset other income by reporting this loss on personal income taxes
  • More expensive to establish than a sole proprietorship or partnership
  • Paperwork is more complicated than the paperwork required for a LLC, but similar advantages
  • The ownership interest of the various owners determines their respective incomes from the profits of the business
  • Some benefits are only given to owners that have more than 2% of the business' shares
Professional Corporation
  • Owners are not personally liable for the malpractice of other owners
  • More expensive to establish than a sole proprietorship or partnership
  • The paperwork and filings may be onerous to owners
  • Every owner must be in the same profession as all other owners
Nonprofit Corporation
  • Corporation does not pay income taxes on money it receives for a charitable purpose
  • Donors that give for a charitable purpose may deduct their donations from income taxes
  • Some benefits may be deducted as business expenses
  • The full tax benefits and advantages can only be utilized by businesses that have been incorporated for a charitable, educational, scientific, religious or literary purpose
  • If property is transferred to the nonprofit corporation, the property must stay with the corporation. Even if the corporation ends, the property must go to another nonprofit
Limited Liability Company (LLC)
  • Owners of the business enjoy limited liability for the business' debts, judgments and other liabilities, even if the owners engage in significant control of the business
  • The business profits and losses can be allocated to the owners along different lines than ownership interest (for example, a 10% owner may be allocated 30% of the business' profits)
  • Owners can choose how the LLC will be taxed, either as a partnership or a corporation
  • More expensive to establish than a sole proprietorship or partnership

Professional Limited Liability Company

  • Allows state licensed professionals to enjoy the same advantages as a LLC
  • Same disadvantages as a LLC
  • All members must belong to the same profession
Limited Liability Partnership
  • Business entities associated with things like law, medicine and accounting normally use this
  • Partners are not liable for the malpractice of other partners
  • Partners take their share of loss or gain on their personal income taxes
  • Partners remain personally liable for obligations to business creditors, landlords and lenders
  • Not every state allows limited liability partnerships
  • Often limited to only a select few professions

Let an Attorney Help You Decide on a Legal Structure for Your Business

The operation of your company will be formed largely by the type of business entity you choose, which will depend on a number of factors. If you need professional legal help in deciding which legal structure to use, or just need help getting started, contact a business and commercial law attorney licensed in your state.

See FindLaw's Choosing a Legal Structure section for additional articles and resources.

Next Steps
Contact a qualified business organizations attorney to help you
choose the best formation for your business.
(e.g., Chicago, IL or 60611)

Help Me Find a Do-It-Yourself Solution