If you are a small business owner or someone looking to start your very own business, you need to be very familiar with the different types of business structures out there. The type of business you choose will determine a lot of things including filing taxes, legal liabilities, and ownership of the business.
In this post, we will cover the 5 business types of business covered by the IRS: Sole Proprietorships, Partnerships, Corporations, S Corporations, and Limited Liability Companies. We will discuss each of these types of businesses, give insights into how the Latino/Immigrant populations fit into these businesses and help you figure out which one is right for you.
Defining Different Types of Business
Below is a quick definition of each type of business, as well as some important concepts to know in regards to that type:
Sole Proprietorships are the most common types of business in the U.S., as they are the simplest to operate. A sole proprietorship is simply an unincorporated business owned and ran by one person. The business is not considered distinct from the owner, which means that the owner can be personally liable for any debts or lawsuits caused by the business. While sole proprietorships are great for those who want complete control of their business, it does make it harder to fund the business as you are less likely to be able to find investors or be approved for loans.
Related Read: How to File Taxes as a Sole Proprietorship
A partnership is very similar to a sole proprietorship, except that there are multiple owners instead of one. This is most commonly used by married couples who want to start their own business, but keep in mind that a partnership can have more than two owners. Each owner has equal control of the business, and liability is similar to that of a sole proprietorship. Each partner is equally liable, which means that if one partner takes out a loan both partners are now liable for that loan. Partnership taxes are shared and reported by both partners.
Related Read: Sole Proprietorship vs Partnership
Corporations, sometimes referred to as C Corporations, are businesses that are considered to be legally separated from their owners. The biggest difference between a corporation and sole proprietorship is that the owners are not personally liable for the debts or obligations of the corporation. Corporations are also taxed separately from their owners, often being taxed twice (once on profits, and again when dividends are paid to stockholders). The owners being separate makes this type of business much longer-lasting, because if the owner leaves the business (or becomes ill or deceased) the business can carry on unlike the previous types of businesses.
S Corporations are special corporations that were created in order to avoid the double taxation that corporations face that was explained above. These operate like C Corporations with the exception that profits, and some losses, can be passed directly to the owner’s personal taxes, so the owner’s do not have to pay taxes on profits and dividends. S Corporations have stricter regulations that you must meet in order to create one, including stipulations such as having no more than 100 shareholders or forbidding anyone but a U.S. citizen from being a shareholder.
Related Read: How to File Taxes as a Corporation
Limited Liability Company
A Limited Liability Company (LLC) is a sort of mix between partnerships and corporations. Like corporations, owners are not personally liable for debts or obligations created by the company. Like partnerships, the profits and losses can be passed through to the owner’s taxes so there is no double taxation. While this may seem like the best of both worlds, keep in mind this type of business has varied regulations and requirements in each state. Some states impose special franchise taxes, while others may only allow LLCs under certain conditions.
Related Read: How to File Taxes as an LLC
Types of Business at a Glance
Since there was a lot of info above, here is a quick chart you can use to remember the different types of businesses:
|Type of Busines
|Limited Liability Company||
What Are the Most Common Types of Business?
This graph from the Tax Foundation shows the number of each type of business found in the U.S. in 2010:
Out of 37 million businesses that filed tax returns to the IRS in 2010, a whopping 81% were sole proprietors, while S Corps/Partnerships made up only 13.5% of registered businesses that year, and the least popular being C Corporations which only made up 5.4% of registered businesses. There are currently no solid numbers on the percentage of LLCs in the U.S., but an educated guess would put the number somewhere in between sole proprietorships and partnerships (likely 10-15 million).
Latinos and Type of Business
Today, there are 4.65 million Hispanic-owned businesses, representing approximately 14% of businesses in the U.S. Many of these businesses were smaller businesses (sole proprietorships), and around 30% of them were home-based businesses. Latinos were also more motivated to start their own businesses (they were as much as 1.5 times more likely than the general population to start their own business).
Latinas have especially become a growing force in the business sector. In California alone, the number of Latina owned businesses had increased by 111 percent. Of these Latina-owned business, 9 in 10 of them are sole proprietorships with no employees.
Learn here some interesting data on women entrepreneurs and Latinas.
In terms of corporations, Latinos are tending to stray from and leave the corporate sector. Only two percent of corporate board seats and four percent of corporate executive positions are filled by Latinos. There are currently a mere 9 CEOs at the head of Fortune 500 companies. It seems that many Latino and Latina entrepreneurs are more interested in going it alone or are finding boundaries preventing them from climbing the corporate ladder.
Undocumented Immigrant Business Owners
Many would assume that the undocumented portion of the Hispanic population would not be working, much less running their own company. However, in reality, 10 percent of undocumented immigrants are entrepreneurs running their own small business. Approximately 950,000 undocumented immigrants are working either as independent contractors or owners of their very own business. This is because it is possible to start a business using only an Individual Tax Identification Number (ITIN) instead of a Social Security Number. These are not always one person businesses either, as some undocumented immigrants even have their own employees, some of which are U.S. citizens.
As stated at the beginning of this article, some states have regulations preventing anyone but U.S. citizens creating or having ownership of Corporations, so most undocumented immigrants are sticking to sole proprietorships, partnerships, or limited liability companies.
So What Business Structure is Right for Me?
There has been a lot of information to take in, so here’s a quick rundown of why you might be better off using certain business types:
You may want to create a sole proprietorship if you:
- Want to be your own boss
- Want complete control of your business
- Don’t want your profits to be taxed twice
- Are an undocumented immigrant without a Social Security Number
You may want to create a partnership if you:
- Don’t want to run a business on your own, but don’t want to create a corporation
- Have family, friends, or partners that you want to start a business with (make sure you can trust them completely!)
- Don’t want to pay dividends to shareholders
- Don’t want to deal with stricter regulations and reporting
You may want to start a limited liability company if you:
- Don’t want to be personally liable for the debts and obligations from your business
- Don’t want to deal with multiple taxations and creating a separate legal entity
- Are not a U.S. citizen (having no Social Security Number)
- Are well aware of your state’s regulations and are not planning to move from state to state very often
You may want to start a corporation if you:
- Want your business to be completely separate from you legally
- Want to attract investors and have an easier time getting approved for loan financing
- Want your business to continue running even after you quit or die
- Are willing to take on stricter regulations by frequently updating reports on your company’s financials and business structure
We hope that this article has helped you determine what business type is right for you. It is important to find the right legal formation for your business, and doing so will set you up for success down the road.