What Is A Sole Proprietor, LLC, S Corp, C Corp, Partnership?
Updated: Oct 17, 2022
In one episode I welcomed Nisi Harrel, Founder of Twerk N Fab, discussed the different types of business structures, and there are mainly 4 types of business structures: sole proprietor, General partner, LLC, and corporation which is divided into two sub-groups, which I will explain.
A Sole Proprietor is someone who owns an unincorporated business that has just one owner who pays personal income tax on profits earned from the business.
Examples include real estate agents, consultants, freelancers, artist, landscapers, and accounts, a podcast host to name a few.
As a sole proprietor, there is no need to apply for an employee identification number (EIN) which we’ve highlighted on a pervious episode.
Limited Liability Company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities, i.e., if an LLC is sued, the owners' personal assets are protected and only the LLC assets can be used during liquidation.
In fact, there are many well-known companies that are disgusted as LLCs:
A General Partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, and financial and legal liabilities.
It is important to understand that partners agree to unlimited liability, meaning liabilities are not capped and can be paid through the seizure of an owner's assets.
This is different than an LLC where assets seized must be owned by the LLC, i.e., car, computer, office, house, coffee mug, office plant, toilet paper - any asset.
Furthermore, any partner may be sued for the business's debts, according to Investopedia. Example of a general partnership includes:
Law firms
Independent medical practices
Architectural firms
Family venture
The last two business structures I will highlight are s-Corp and c-corp.
Even though both business structures get their names from the parts of the Internal Revenue Code that they are taxed under, understanding the difference between the two is important.
S Corporation refers to a type of corporation that meets specific Internal Revenue Code requirements. If it does, it may pass income (along with other credits, deductions, and losses) directly to shareholders, without having to pay federal corporate taxes.
S Corps are usually associated with small businesses (100 or fewer shareholders), and the S Corp status effectively gives a business the regular benefits of incorporation while enjoying the tax-exempt privileges of a partnership, per Investopedia.
Examples can be very board; however, the key is it must be a small business 100 or fewer stakeholders.
A C corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.
Almost all C Corps are publicly traded companies, but not all; however, all public traded companies must be a C Corp to trade stocks.
I am sure some of you right now are wondering: wait a minute, Mr. Gabriel Flores just said Nike is an LLC and is trading as a C-Corp – how is that show?
Instead of Phil Knight and Nike owning roughly 128.5 million shares of Nike, the C Corp, Phil created an LLC company to hold those Class A shared to 14 directors, which means the new entity, called Swoosh LLC, will have an important voice in the future of the sportswear giant, per Matthew Kish from Portland Business Journal.
S Corps are not publicly traded companies. This is because an S Corp can only have 100 shareholders, while a C Corp can have an unlimited number of shareholders.
The Entrepreneur should have a good idea of what business structure they plan to function in, and understanding the pros and cons of each type is important.
Taxation is also an important concept to understand when determine the business structure – something I certainly will not go over because I am not a tax advisor or tax account.
However, I would encourage the entrepreneur to take some time to comprehend the various business structures.
If this task seems too daunting, do not be discouraged to ask for help!