7 Types of companies You Must Know

There are various types of companies operating in the United States today. These range from simple sole proprietorships to more complex and involved corporations. Since nearly every company once existed as a small business, entrepreneurs need to determine which company structure is most suitable for their circumstances as the business grows. Each comes with various legal implications that pertain to personal liability protection and tax exemptions, among other things. 

Sole proprietorships

Sole proprietorships consist of one individual and are the simplest business structure in North America. Since there is no distinction between the person behind the business and the business itself, a sole proprietor is financially liable for any debts or damages that are incurred.

Sole proprietors are not required to take any formal action to form this type of company. However, they will still need to obtain licenses and permits that are state and industry-specific. What’s more, they will also have to file what is known as a fictitious name if they wish to do business under a name that is not their personal or given name.

Limited liability companies (LLCs)

Limited liability companies are business entities characterized by the separation of the founders of the business and their personal liability. In more specific terms, the personal assets of the founders are protected in the event the business suffers any kind of financial damage.

The individual has flexibility when incorporating an LLC and can choose any business structure they want. They may elect to choose a general partnership or a board of directors structure – or another structure that falls somewhere in between.

There are also various perks to the limited liability company, including simpler taxation at the personal level and taxes that can be reduced if the founder owns multiple real estate properties under different LLCs.

Limited liability partnerships (LLPs)

Limited liability partnerships are similar to limited liability companies in that the founders can structure the company as they see fit. LLPs are characterized by perpetual succession. This means the existence of the company does not change if one partner resigns, for example.

In a limited liability partnership, each founder has rights and responsibilities that are laid out in a formal agreement according to the particular state jurisdiction. Each is liable for any financial problems the company experiences in proportion to their investment in the company itself. They are not responsible for the harmful behavior of other partners, such as negligence or fraud.

S Corporations

S Corporations are those that choose to pass corporate income, deductions, losses, and credits to their shareholders. Shareholders complete their personal tax returns by reporting the flow-through of income and losses, which allows the S Corporation to avoid double taxation on its corporate income

To qualify as an S Corporation, the company needs to satisfy these criteria:

  • Consist of no more than 100 allowable shareholders. Here, this refers to individuals, certain trusts, and estates. 
  • Possess only one class of stock. 
  • Be a corporation that operates domestically.
  • Not be an ineligible corporation. These include insurance companies, some sales corporations, and certain financial institutions.

C Corporations

C Corporations are one of the more common types of corporations in the United States. Unlike the S Corporation, the shareholders of a C Corporation are taxed separately and the corporation itself cannot avoid paying income tax.

C Corporations offer unlimited growth potential through the sale of shares and there is no limit to the number of individual shareholders it can have. However, these corporations are expensive to register and they are subject to increased government scrutiny. This is due to complicated tax rules and the presence of limited liability for the owners of the firm and its investors.

B Corporations

B Corporations are for-profit companies that are certified to meet high standards of transparency, accountability, and social and environmental stewardship. While turning a profit is important for a B Corp, it also prioritises other factors such as workers, customers, community, and governance.

B Corp certification is a highly selective and rigorous process, with corporations required to prove their worthiness every three years to maintain their status.

Non-profit corporations

Non-profit corporations share structural similarities to traditional corporations. They tend to have a board of directors in addition to financial backers or donors. But, as the name implies, non-profit corporations do not generate any profit and must only be created in support of a specific, public cause.

These corporations do not pay corporate or federal taxes and are allowed to receive funding from a diverse range of sources, including other corporations, philanthropists, and grants. 

Key takeaways:

  • There are various types of companies operating in the United States today. These range from simple sole proprietorships to more complex and regulated corporations.
  • In a sole proprietorship, there is no distinction between the founder and the business itself. This means the sole proprietor is financially liable for any debts or damages that are incurred. Limited liability companies (LLCs) and limited liability partnerships (LLPs) provide varying degrees of liability protection for companies with two or more members.
  • Various corporation types also exist in the United States. Some examples include S Corporations, C Corporations, B Corporations, and non-profit corporations.

Key Highlights

  • Sole Proprietorships:
    • Simplest business structure consisting of a single individual.
    • No legal distinction between the individual and the business.
    • The proprietor is personally liable for debts and damages.
    • Licenses, permits, and fictitious names might be required.
  • Limited Liability Companies (LLCs):
    • Provides separation of personal liability from the business.
    • Flexible structure with various options, like general partnership or board of directors.
    • Personal taxation benefits and potential for reduced taxes with multiple real estate properties under different LLCs.
  • Limited Liability Partnerships (LLPs):
    • Similar to LLCs in structure flexibility.
    • Partners have defined rights and responsibilities.
    • Liability is proportionate to each partner’s investment.
    • Partners not held responsible for harmful behavior of others.
  • S Corporations:
    • Passes corporate income, deductions, and more to shareholders.
    • Avoids double taxation on corporate income.
    • Specific criteria must be met, like limited number of allowable shareholders and single class of stock.
  • C Corporations:
    • Shareholders and corporation taxed separately.
    • Offers unlimited growth potential through share sales.
    • Expensive to register, subject to complex tax rules, and faces government scrutiny.
    • Provides limited liability for owners and investors.
  • B Corporations (B Corps):
    • Certified for-profit companies with high standards of transparency, accountability, and social/environmental responsibility.
    • Consider profit as well as factors like workers, customers, community, and governance.
    • Rigorous certification process required to maintain B Corp status.
  • Non-profit Corporations:
    • Similar structure to traditional corporations but not for profit.
    • Created to support a specific public cause.
    • Exempt from corporate and federal taxes.
    • Funding can come from various sources, including corporations, philanthropists, and grants.

Connected Business Concepts

Limited Partnership vs. General Partnership

limited-partnership-vs-general-partnership
A limited partnership is characterized by one or more partners that are not involved in the day-to-day operations of the business. A general partnership is the more common type of partnership of the two. It refers to a scenario where all partners contribute to the day-to-day management of the business.

LLC vs. S-Corp

llc-vs-s-corp
An LLC is a limited liability company. This type of company offers a corporation’s limited liability protection but with a partnership’s tax benefits. An S-corp is a “pass-through” entity, meaning the business’s income and losses are passed to the owners and taxed at their income tax rate.

LLC vs. LLP

llc-vs-llp
A limited liability company (LLC) is a separate business entity with one or multiple owners that are otherwise known as members. Various legal filings and fees are required to create an LLC. A limited liability partnership (LLP), on the other hand, is a general partnership between two or more people that does not require legal filings.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Price Ceiling

price-ceiling
price ceiling is a price control or limit on how high a price can be charged for a product, service, or commodity. Price ceilings are limits imposed on the price of a product, service, or commodity to protect consumers from prohibitively expensive items. These limits are usually imposed by the government but can also be set in the resale price maintenance (RPM) agreement between a product manufacturer and its distributors. 

Price Elasticity

price-elasticity
Price elasticity measures the responsiveness of the quantity demanded or supplied of a good to a change in its price. It can be described as elastic, where consumers are responsive to price changes, or inelastic, where consumers are less responsive to price changes. Price elasticity, therefore, is a measure of how consumers react to the price of products and services.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Network Effects

network-effects
network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. Negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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