News and advice for small business owners, by small business owners.

Call us for free financing advice:

1 (800) Fundera 386‐3372
equipment-leasing

Pros and Cons of Each Business Entity Type (And How To Choose)

There are pros and cons to each business entity type, but picking the right one can be challenging. Take the confusion out of the selection process by exploring the different structures and their pluses and minuses. Then, determine which business structure will work best for you.

1. Sole Proprietorships

A sole proprietorship is the simplest business entity. It is headed by one person who is the owner and operator of the establishment. Commonly used by freelancers and other service professionals, it’s also a viable option for many other businesses—from restaurants to retail stores—being managed by one person.

The Pros

  • Easy to start up
  • There are no fees required to create the business
  • Net business losses can be deducted from your personal taxes

The Cons

  • As the owner, you are personally liable for debts and other liabilities
  • You pay personal income taxes on your business’s net profits

2. General Partnerships

Partnerships, as you might expect, are owned and operated by two or more individuals. There are kinds of partnerships: general partnerships and limited partnerships. In general partnerships, all partners manage the business and assume responsibility for its debts.

The Pros

  • Easy to start up
  • There are no fees required to create the business
  • Net business losses can be deducted from owners’ personal taxes

The Cons

  • Owners are personally liable for debts and other liabilities
  • Owners pay personal income taxes on the business’s net profits

3. Limited Partnerships

In limited partnerships there are two kinds of partners: those who own, operate, and assume liability for the business (general partners) and those that act only as investors (limited partners). Limited partners don’t have any control over business operations, and have fewer liabilities. Real estate investment businesses are commonly formed as limited partnerships.

The Pros

  • Relatively easy to get investors because limited partners have limited liability
  • General partners get the money they need to operate but maintain authority over business operations
  • Limited partners can leave anytime without dissolving the business partnership

The Cons 

  • General partners are entirely responsible for debts and liabilities
  • More expensive to create than general partnerships

4. Corporations

Corporations are completely independent legal entities that exist separately from the company’s owners. With this business entity there are many more regulations and tax laws that the company must comply with. Methods for incorporating, fees, and required forms vary by state.

The Pros

  • Owners’ responsibility for debts and other liabilities is limited
  • In certain cases, benefits can be deducted as business expenses
  • Taxes can be lowered when owners and the business share profits

The Cons

  • Can be more expensive to create than both sole proprietorships and partnerships
  • Complicated legal paperwork must be filed with your state
  • The business is a separate tax entity that must pay taxes

5. S-Corporations

In order to avoid some of the drawbacks associated with operating a regular corporation, some business owners choose an S-Corporation business structure. With an S-corporation, company profits and losses are passed on to shareholders.

The Pros 

  • Owners’ responsibility for debts and other liabilities is limited
  • Owners share net profits or losses and report them on their personal income taxes

The Cons

  • Like regular corporations, S-corporations can be more expensive to create than both sole proprietorships and partnerships
  • Ownership interest determines how much personal income is earned or lost from the business

6. Limited Liability Company

Limited liability companies (LLCs) are a hybrid business entity type that blend some of the positive features of partnerships and corporations. They give owners liability protections without having to pay double taxes.

The Pros

  • Owners’ responsibility for debts and other liabilities is limited even if they have control of the business
  • Profits and losses do not have to be allocated according to ownership interest
  • Owners get to choose whether the LLC is taxed as a partnership or a corporation

The Cons

  • LLCs are more expensive to establish than partnerships and sole proprietorships

With a better understanding of how the common business entity types work and their respective pros and cons, you can determine which business entity works best for your small business.

Emily Suess

Contributor at Fundera
Emily Suess is a contributor for Fundera and a freelance blogger and copywriter specializing in technology and small business.