Types of Business Structures and When to Use Them

July 21, 2025

When you’re starting a business, one of the first big decisions you’ll face is choosing a business structure. It’s not just a box to check on a form—it affects your taxes, your personal liability, and even how you run your day-to-day operations.

The good news? You don’t need a law degree to understand the basics. In this guide, we’ll break down the most common types of business structures in plain language, along with when each one might be the right fit for your goals.

Sole Proprietorship

A sole proprietorship is the simplest and most common way to start a business. You are the business—there’s no legal separation between you and the work you do. If you’ve ever sold goods at a market, repaired something for a client, or taken on freelance work without forming a legal entity, you’ve operated as a sole proprietor.

Best for:

Solo operators who are testing an idea, running a side hustle, or starting small without outside investment.

Pros:

Easy to set up—often with no formal registration required
Lowest startup costs of any business structure
Complete control over decisions and profits

Cons:

No separation between personal and business liability—your personal assets are at risk if the business is sued or takes on debt
Harder to raise funds or take on partners
May feel “less official” to some customers or vendors

Sole proprietorships are a great way to get moving quickly, but they offer the least legal protection. Many business owners start here and then switch to a different structure as they grow.

Partnership

A partnership is a business owned by two or more people who share responsibilities, profits, and decision-making. It’s a simple way for two or more individuals to combine their skills, resources, and time to run a business together.

There are different types of partnerships—general partnerships (where everyone shares equally in profits and liabilities) and limited partnerships (where some partners invest but don’t manage the day-to-day). The right choice depends on how involved each partner will be.

Best for:

Businesses with co-founders who bring complementary skills, resources, or industry connections.

Pros:

Easy to set up with minimal paperwork compared to corporations
Shared investment and workload
Ability to combine different expertise and strengths

Cons:

Each partner is personally liable for business debts and obligations in a general partnership
Disagreements can disrupt operations without a clear agreement in place
Profits are shared, which can cause friction if workloads aren’t balanced

If you’re considering a partnership, a written partnership agreement is essential. It should outline responsibilities, decision-making processes, and what happens if someone wants to leave the business. It’s the best way to protect both the business and the relationship.

Limited Liability Company (LLC)

A Limited Liability Company, or LLC, is one of the most popular business structures for small to medium-sized businesses—and for good reason. It combines some of the best features of a corporation and a sole proprietorship, giving owners flexibility while also protecting their personal assets.

In an LLC, the business is considered a separate legal entity. That means if your company is sued or takes on debt, your personal property (like your home or savings) is generally protected. You also have flexibility in how you’re taxed—you can choose to be taxed as a sole proprietor, partnership, or corporation, depending on what works best for your situation.

Best for:

Small to medium-sized businesses that want liability protection without the complexity of a full corporation.

Pros:

Protects personal assets from most business liabilities
Flexible management structure—can be run by the owners or by appointed managers
Multiple tax options to choose from
Often viewed as more “official” than a sole proprietorship, which can help with credibility and funding

Cons:

Requires state registration and has annual fees in most states
More paperwork than a sole proprietorship or partnership
Certain industries or states may have additional compliance requirements

An LLC is often a smart next step for businesses that have grown beyond the early testing phase and want both protection and flexibility.

Corporation (C Corp & S Corp)

A corporation is the most formal—and most complex—type of business structure. It’s a completely separate legal entity from its owners, which means it can own property, enter into contracts, and be held liable on its own. Owners (shareholders) are generally not personally responsible for business debts or lawsuits.

There are two main types small business owners consider:

C Corporation (C Corp) – The standard corporate structure, taxed separately from its owners. Profits can be reinvested into the company or paid out as dividends.
S Corporation (S Corp) – A special tax status that allows profits and losses to pass through to owners’ personal tax returns, avoiding “double taxation” on corporate profits.

Best for:

Businesses seeking outside investors, planning significant growth, or operating in industries where a corporate structure is standard.

Pros:

Strongest liability protection of any business structure
Easier to raise capital through investors or stock
Viewed as highly credible by banks, partners, and clients
Can offer employee benefits and stock options

Cons:

Most paperwork and compliance requirements of all structures
More expensive to form and maintain
Complex tax rules, especially for C Corps
S Corps have ownership restrictions (e.g., number of shareholders, U.S. citizenship requirements)

For many small businesses, a corporation is something you work toward rather than start with—unless you’re seeking major investment from the beginning.

Choosing the Right Structure

There’s no one-size-fits-all answer when it comes to business structures—the right choice depends on your goals, risk tolerance, and stage of growth.

Here are a few things to consider:

Risk and liability – How much personal risk are you willing to take on? If you work in a field with higher liability, an LLC or corporation can give you added protection.
Funding needs – Will you need outside investors or financing? Corporations tend to attract more formal investment, while sole proprietorships and partnerships may rely more on personal funds or loans.
Growth plans – Are you looking to scale quickly, or keep operations lean and local? Flexible structures like LLCs allow you to adjust as you grow.
Management style – Do you want full control, shared decision-making, or a board of directors guiding the company?
Tax implications – Some structures allow profits and losses to “pass through” to your personal taxes, while others pay taxes separately as a business.

It’s also worth noting: your first choice doesn’t have to be your last. Many business owners start as sole proprietors or partnerships, then switch to an LLC or corporation as they expand.

Before deciding, it’s smart to speak with a tax professional or attorney who understands your state’s laws and your industry’s requirements. The right structure is the one that supports your business now—and sets you up for where you want to go.

Start Smart, Grow Strong

Choosing your business structure is one of the first real steps from “idea” to “official.” It shapes how you operate, how you’re taxed, and how much personal risk you take on. But remember—it’s not permanent. Many successful businesses start small, learn as they go, and adjust their structure to match their growth.

At WorkBay, we’re here to support you at every stage. Whether you’re a one-person startup in your first sole proprietorship or a growing LLC looking for space to scale, we make getting a professional, move-in-ready unit simple and straightforward.

Your business structure is your foundation—your workspace is your launchpad. Let’s get you both in place.