10 Types of Business Structure (2024) - Shopify Malaysia (2024)

Before you can turn your business idea into a reality, you’ll need to pick a legal business structure to represent your activities.

Your business type is no mere administrative detail. How you structure a business determines things like corporate and personal taxes, and may alter your day-to-day operations.

The type of business you choose to register as will also impact your financial liability for any business debts. If you apply for investment or funding, your business type will again affect your options.

Read on to learn about the 10 different types of business structures available for your small business, and how to decide which one is right for you.

10 types of business structures

1. Sole proprietorship
2. General partnership
3. Limited partnership
4. Limited liability partnership (LLP)
5. C corporation
6. S corporation
7. Benefit corporation
8. Limited liability company (LLC)
9. Nonprofit
10. Joint venture

The way you organize your business depends on whether you are acting alone or with partners, how much personal liability you are willing to accept, whether you need to issue shares, and the types of licenses and insurance your business needs.

1. Sole proprietorship

In addition, sole proprietors have complete control over their companies, and enjoy a single round of taxation on personal income.

Nevertheless, the ease of setting up a sole proprietorship is a double-edged sword. This business type offers the lowest protection for owners, and sole proprietors are fully liable for their companies’ financial and legal situation.

This means that if your business falls on hard times, your personal assets may be drawn on to settle business debts.

💡 Shopify’s suite of tools can help sole proprietors manage their orders, inventory, taxes, marketing, and more.

2. General partnership (GP)

General partnerships are the default form of business partnership: a business owned by two or more people.

Like sole proprietorships, general partnerships are subject to pass-through taxation, meaning they are only taxed once, at the partners’ personal income levels. In addition, general partners are equal participants in the firm, meaning everyone has a say.

However, general partnerships are vulnerable to some of the same drawbacks as sole proprietorships. Because there is no legal distinction between the general partners and the partnership itself, all owners are subject to unlimited liability for the company’s debts and damages.

Creditors and lawsuit plaintiffs can reach partners’ personal assets, and general partners are liable for the business conduct of all other partners—so choose your co-founders wisely!

3. Limited partnership (LP)

Like general partnerships, limited partnerships are owned by two or more people, and enjoy pass-through taxation. The key difference between LPs and GPs is the existence of limited partners, who have limited liability for the business, according to the amount of capital they’ve invested.

One downside of a limited partnership is that limited partners may not have much say in the day-to-day running of the firm. This can be frustrating if you’re conscious about personal liability or have ideas about how to run the business more effectively.

💡 All limited partnerships must have at least one general partner, who is subject to unlimited liability.

4. Limited liability partnership (LLP)

The final type of partnership, LLPs, are owned by two or more partners and enjoy pass-through taxation. While partners in an LLP are liable for their own conduct, they are not personally liable for the conduct of other partners or the debts and damages of the business.

An LLP business structure provides additional separation between personal and company assets. Unfortunately, however, LLP status is not available to all types of businesses: it’s exclusive to certain licensed professions, such as law or accounting.

5. C corporation

C corporations, or C corps, are one of the most common types of corporation, and the ideal ownership structure for a large company. That’s because a C corporation is a legal entity that’s completely separate from its owners, offering the strongest personal liability protection.

Another advantage of forming your small business as a C corporation is the relative ease of fundraising. C corps can be funded by issuing shares of stock. You can issue as many shares as you like, as well as offer both common stock and preferred stock types.

One drawback of C corps compared to other types of business is that each C Corp is a complex business organization requiring a detailed filing and registration process, as well as oversight via the drafting of bylaws and appointment of a board of directors.

Above all, the main downside of forming a C Corp is that you will not enjoy pass-through taxation status. That means C corporations pay income tax twice: once on corporate income, and again on the personal income of owners and shareholders.

💡 C corporations can design bespoke commerce solutions for their business needs with Shopify.

6. S corporation

S corporations, or S corps, sidestep the double taxation issue that C corps face. Like partnerships, S corps are pass-through entities, which means that instead of paying corporate income tax as a business entity, they are taxed only once, at the owners’ and shareholders’ personal income levels.

That advantage is offset by limits on fundraising and strict requirements for maintaining S Corp status. For instance, S corps may only issue common stock to a maximum of 100 shareholders, and those shareholders must be individuals who are citizens or permanent residents of the United States.

7. Benefit corporation

A benefit corporation, sometimes called a B corp, is a different type of for-profit corporation, recognized by most US states. While they’re taxed the same way as C corps, benefit corporations place added emphasis on making a positive impact on local communities and the environment.

While a benefit corporation can both do good and generate profits, it’s subject to the same requirements as C corporations. Plus, a benefit corporation must demonstrate its commitment to a higher calling by publishing an annual report assessing its social and environmental performance.

8. Limited liability company (LLC)

Limited liability companies meld many of the characteristics of a partnership with those of a traditional corporate legal entity. LLCs are distinct legal entities, which helps to protect owners from personal liability for any debts and damages accrued by the business.

An additional advantage of forming your small business as a limited liability company is tax flexibility. LLCs can opt to be taxed as corporations (twice), or as pass-through entities like sole proprietorships and S corps.

The downside of forming a limited liability company is that the registration process is more complex than with sole proprietorship or partnerships. For instance, an LLC must write and file articles of incorporation, and appoint a registered agent.

9. Nonprofit

A nonprofit is a business that has been granted tax-exempt status by the IRS on the basis that it advances a social cause benefiting the public. In essence, nonprofit refers primarily to a business’s tax status, as most nonprofits are also corporations.

The main advantage of forming your small business as a nonprofit is the tax benefit: if your organization qualifies as a 501(c)(3) tax-exempt organization under the Internal Revenue Code, it won’t have to pay federal income tax.

Nevertheless, nonprofits are limited in the business activities they can pursue, and must reinvest all profits into the business.

10. Joint venture

A joint venture is essentially a partnership between one or more separate business entities. In these types of business arrangements, firms agree to pool resources toward the achievement of a specific task—often on a temporary basis.

Businesses might undertake joint ventures to win a contract, purchase real estate, or respond to changing industry regulations.

The upside of joint ventures as a business structure is that they allow participants to benefit from the resources of other participating firms without forfeiting independence by merging them into one organization. The main disadvantage, however, is that each participant is responsible for all the costs and losses of the joint venture.

Business entities and tax status

Different types of businesses qualify for different tax treatment by the US Internal Revenue Service (IRS), as well as state and local tax authorities.

Business tax statuses include:

• Pass-through tax status. Taxes are “passed through” from a company to its shareholders, who pay personal income tax on dividends.
• Corporation tax status. Corporations are taxed twice: once on corporate income and again on shareholders’ personal income.
• Nonprofit tax status. Nonprofits are exempt from some taxes at federal and state levels, so long as they meet eligibility requirements.

Determining which type of business is right for you

Determining what structure is right for your small business is one of the most important decisions you will make as an entrepreneur.

Here are several questions you and any partners should consider before registering your business:

• How important is the ability to raise money for your business’s financial future?
• Do you prefer complete control over your company, or do you want partners?
• Are you willing to accept unlimited personal liability for the business and conduct of any partners, or would you prefer a level of protection?
• Are you able to pay two rounds of federal taxation?
• Is your business’s mission oriented toward the advancement of some social good for the public benefit?