7 Different Business Classifications
Although there are several different types of business classifications, choosing one doesn't need to be difficult. If you're starting your own business, you'll want to have a plan to help you get a better outline for your goals. If you're looking to start, own, or co-own a business, your first step is to understand the different types of business classifications.
There are seven common types of classifications so you can decide what type of business to register as. The seven types are sole proprietor, general or limited partnership, limited liability company (LLC), corporation, co-op and non-profit. Each structure is different and unique, but depending on the size and function of your business, choosing the right one is key.
What we will later discuss is the tax benefits for each, but first, choosing the right business structure is crucial. Business ownership comes in more forms than most people realize, let's dive in.
What Are The 7 Business Classifications?
There are certain details about each business structure that may determine which choice is best for you. From taxes, ownership, and how your business functions will determine your overall classification and filing with the government.
1. Sole Proprietor
This is the main and simplest business entity. This is where you, the owner, is responsible for all profits and debts. With an easy set up and lower costs, sole proprietors are owned and operated typically by one person.
If you're starting an ecommerce/online business by yourself, a sole proprietorship is probably the best option. If you're starting a business with one or more partners, keep reading.
2. General partnership
A general partnership is where two or more individuals share, equally, day-to-day operations. This business structure is best for those that run a business with family where they share profit, debt, and legal ramifications together. Costs vary but this structure is a bit more expensive to start.
To ensure equal share, attorneys may need to be involved, which can affect start-up costs. Partnerships can operate as a sole proprietor when there is no separation. However if there is a limited liability/partnership then the next one is for you.
3. Limited Partnership
With this business structure there are still two partners, but the limited partner is not liable for debt in the company. This is the best structure if a business is looking for an investor to help in financial resources. The general/main partner will be involved in the business decisions, and have personal liability in their business.
A limited partnership is still very common and is a great way to start a business. Be sure to keep in mind your partnership agreement to ensure all parties are happy in the involvement of business.
4. Limited Liability Corporation (LLC)
This hybrid structure allows owners, partners and/or shareholders to limit their personal liabilities. All involved will get special tax benefits and share in all profits. An LLC was created to provide business owners with the same protection that corporations may enjoy.
5. Corporation
This is a fully independent business that is made up of shareholders and stock. If you are starting off as a small business, declaring yourself as a corporation wouldn’t be appropriate. However, if you have several employees within an established business, this may be the right structure.
There are three different types of corporations, C, S, and B. Each one has its benefits in taxes and deductions. The most common is the “C” Corporation which has its own benefits, in taxes and overall structure.
a. C- owned by shareholders and allows unlimited investors. Ex: Apple and Amazon
b. S- designed for small businesses where owners share limited liability protection. S-Corp’s can not have more than 100 shareholders.
c. B-long-term commitment and is a for-profit entity to positively impact society. (fight against human trafficking, domestic violence, etc)
6. Cooperative/ Co-Op
This is a fully-owned and operated business by the members of an organization that uses your services. This structure is determined by whatever is earned is shared among all members themselves. The main difference in the process of becoming a cooperative is that your organization must create bylaws, have a membership application, and have a board of directors.
7. Non- Profit Organization
This business is fully intended to promote educational and charitable programs. The main aspect is to earn money from organizations to cover expenses, programs, etc. Keep in mind there are a lot of different types of non-profits available and to become one requires a specific application.
Depending on the parameters of your business, you may not fully be able to categorize your business as nonprofit.
Final Thoughts
There is no “best” form of business classification to start. You should sit down and review your business plan to determine what your long-term future looks like. This will help you decide which kind of business to pursue, based on the needs of the business itself and day-to-day operations.
Credit: Gina Robertson
Proofing and Editing by: Tiffany Slifka