The Organizational Structure of a Startup Company

New business startups have a variety of organizational structures from which to choose.

One of the first and most important decisions a startup company must make is to choose its business structure. There are a host of options for a new startup's organization, from sole proprietorships and partnerships to various types of corporations, and each has its advantages and disadvantages. Your startup can benefit from tax and financing provision by choosing the structure that best fits your business type.

Sole Proprietorship

For individuals who are starting new businesses, a sole proprietorship is the quickest, easiest form of business structure to begin with. Sole proprietorships require no governmental filings and begin their legal existence as soon as the business starts operating. Income and expenses are accounted directly to the individual starting the business, so there are no separate tax returns to prepare for the business, either. However, individuals who start sole proprietorships are not sheltered in any way from business losses or lawsuits, and raising outside investment is usually difficult.

Partnership

A partnership is a corporate structure in which each of the partners share in the business' operations, decisions, profits and losses. In a general partnership, each member is responsible for the actions of the other(s), and all share in liability for the business' debts or judgments. In a limited partnership, limited partners enjoy a measure of protection from liabilities of the partnership, while the general partner(s) remain liable. Partnerships most often are used as an organization structure for professional service businesses, such as lawyers, doctors and accountants.

C-Corporation

C-corporations are companies in which an unlimited number of shareholders may own a portion of the business. Individual shareholders cannot be held personally liable for the debts, judgments or actions of the corporation, and so are at risk only for the amount they've invested. C-corporations are ideal for companies that plan to raise money by selling shares to investors, but suffer from "double" taxation -- earnings are taxed once at the corporate level, and then taxed again when distributed to the shareholders.

S-Corporation

The S-corporation is similar to the C-corporation, but differs in two important respects. First, an S-corporation may only have up to 100 shareholders and only one class of stock, limiting its potential to raise capital by selling shares. (Individual shareholders still enjoy liability protection and might only lose the amount they invest.) Second, the S-corporation avoids double taxation by passing its profits and losses directly to its shareholders. For this reason, the S-corporation is a popular business structure for new startup companies.

Limited Liability Corporation (LLC)

A limited liability company, or LLC, may have an unlimited number of members who own a portion of the business, and all of whom enjoy personal liability protection from debts or judgments. Like a partnership, profits and losses are passed on to the members in proportion to their level of ownership and taxed as individual income (no double taxation). A limited liability company does not issue shares or sell stock and, therefore, is not suited to raising large sums of capital.

References

• My Own Business: What Type of Business Organization is Best for You?
• Oblivious Investor: LLC vs. S-Corp vs. C-Corp (The 3-Minute Version)
• Limited Liability Company Center: LLC vs C Corporation vs S Corporation