What Is The Most Common Form Of Business Ownership?
When starting a business, one of the first decisions that you’ll need to make is what business structure (also referred to as a legal structure or entity) to choose for your new company. It’s important to decide on a business structure early, as many later business steps will be formed around this decision, including how it’s taxed, how it’s managed, and your personal liability.
But, with so many different business structures to choose from, how do you decide on what the right one is for your specific situation? I recommend getting professional legal guidance to help make this decision, but we are here to help you do some initial research.
Before we answer what the most common type of business entity is, I’ll first provide a brief overview of the four most common options, which include the sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). Each type of business structure has its own advantages and disadvantages, so you’ll want to consider your options before making a decision carefully.
Four Types of Business Structures
A Sole Proprietorship is an individual who decides to go into business for themselves. There is no state filing to register a sole proprietorship, which makes it the most simple and easiest entity to start and maintain, not to mention it is the lowest cost of the four.
While ease of forming and low cost are major plusses, the downside is that legally, the individual and business are the same. This means the owner is personally responsible for all debts and actions of the company, and if the business is sued, the owner’s personal assets are potentially at risk.
A general partnership is where two or more people decide to go into business together. Similar to a sole proprietorship, most states don’t require a general partnership to register, making it very easy and inexpensive to start and run.
The downsides of the partnership are the same as the sole proprietorship, with the primary concern being the owner’s personal liability. But now, with multiple owners, if the partnership were to be sued, each of the partner’s personal assets are potentially at risk.
A Corporation is a legal entity that is registered with a state (typically through an office called the Secretary of State or something similar) by filing the Articles of Incorporation). This entity is legally separate from the individual business owner(s), unlike the sole proprietorship or partnership, providing limited liability protection.
While corporations are more expensive and complicated to form and administer than sole proprietorships and partnerships, the major advantage is that the corporation shields the owner’s personal assets should the business be sued.
A downside of the corporation is that must be a board of directors meeting, a shareholders meeting, and taking minutes at these meetings to maintain this liability protection. This may seem overkill, especially for a single-owner or very small corporation, as these tasks are critical to protecting the owner’s personal assets.
Corporations can be further designated as a C-corporation or S-corporation by an election with the Internal Revenue Service (IRS). I don’t want to complicate this subject any further, but basically, the IRS provides different corporate income tax elections that affect how business income and dividends are treated. For more information, check out – S Corp Vs. C Corp – How Do You Choose?
Limited Liability Companies (LLC)
An LLC is a type of business structure that is similar to a corporation and is also created with a state by filing the Articles of Organization (or something similar, depending on the state). Like the corporation, the LLC is a separate legal entity and provides its owners with limited liability protection. While more complicated to set up than a sole proprietorship or partnership, it is easier to set up than a corporation. Unlike the corporation, the LLC doesn’t require a board of directors meeting, shareholders meeting, taking minutes at meetings, issuing shares of stock, etc., making it less complicated to administer.
The LLC has additional benefits, such as having the greatest tax flexibility of the four entities. Income can be taxed as a pass-through entity, like the sole proprietor or partnership, or as a corporation to save on self-employment taxes. Not only are there more options for how the entity is taxed, but they can be changed as the business grows.
What is the most popular form of business ownership?
After looking at the different types of business structures, hopefully, you have narrowed it down a bit.
A piece of data that may help in your decision-making, is to look at what do other business owners choose. I used data from the Internal Revenue Service (IRS) and 2019 tax returns. This is the most complete picture since businesses have to report the type of business ownership on their tax return.
Since businesses report the type of business ownership on their tax return, the most reliable source comes from the Internal Revenue Service. In this data, there were 34,284,477 tax filings, and the sole proprietorship is the most common form of business organization by an overwhelming margin. The numbers for each type break down as:
- Sole proprietorship – 27,817,189 (81.1%)
- Corporation (not including nonprofit corporations) – 3,254,582 (9.5%)
- Limited Liability Company – 2,731,022 (8%)
- General partnership – 481,684 (1.4%)
When you’re starting a business, it’s important to choose the right legal structure for your company. The legal structure you choose will determine many things about your business, including how it’s taxed, registration, licensing requirements, how it’s managed, and your personal liability.
If you still aren’t sure, be sure to seek out professional legal guidance to help you make this decision.