Types of Businesses

Before turning your business idea into a thriving business, you must determine the right business structure for your company. This isn't just a formality; your chosen structure is a strategic cornerstone affecting everything from your personal liability to potential investment opportunities. For returning citizens and those currently incarcerated, this decision is even more critical, as liability protection and tax compliance can directly impact post-release success.

This guide draws from three decades of experience as a lawyer and mentor, but we recognize that entrepreneurs with justice-system involvement face unique challenges. Prison liaisons—whether they are legal aid staff, business mentorship program representatives, or dedicated reentry professionals—are there to assist you. They can provide a crucial bridge to the complex legal and administrative requirements of business formation.

They can help you:

• Navigate State-Specific Rules: Liaisons can clarify state rules on business formation and operation, which can be complex, especially with a criminal record.
• Determine Liability Risk: They help assess how each structure (like an LLC versus a Sole Proprietorship) impacts your personal assets, a vital consideration.
• Access Resources: Liaisons connect you with resources like free legal clinics, discounted filing services, and entrepreneurship programs tailored for returning citizens.
• Plan for Post-Release Compliance: They ensure you understand ongoing reporting and tax requirements to avoid compliance issues down the road.

Choosing how to structure your business hinges on several key factors:

• Are you going solo, or do you have partners?
• How much personal financial risk are you comfortable taking?
• Do you plan to issue stock?
• Have you consulted your prison liaison or reentry mentor on how your personal circumstances (including financial and legal history) impact your choices?

These elements will guide you in selecting the most suitable business framework. If you have a great business idea and are ready to start your business, read on to learn about eleven different types of business structures and how to decide the right one.

The Limited Liability Company (LLC) is the favorite of many, protecting personal assets from business debts. Whether flying solo or having partners, an LLC is flexible and relatively easy to set up.

An LLC is a ‘pass-through’ entity because profits flow directly to the owners/members. It’s quickly becoming the most common form of incorporation.

⚠️ A Note on Piercing the Corporate Veil People who ignore the requirements of operating an LLC can lose their personal liability protection in a process called ‘piercing the corporate veil.’ If this happens, business owners can be retroactively held liable to pay corporate debts with personal funds. Your liaison can help you set up an internal compliance checklist to ensure you meet all state requirements, protecting this liability shield.

• Protection against personal liability: Owners enjoy a safeguard for their personal assets.
• Simplicity in formation: Setting up an LLC is more straightforward than a corporation.
• Operational flexibility: An LLC can be a solo endeavor or include multiple members.

• Ongoing state requirements: LLCs must maintain routine filings, like annual reports.
• Limitations on raising capital: LLCs can't issue stock, limiting options for traditional equity fundraising.
• State-level fees: Most states impose yearly fees on LLCs.

General partnerships allow for two or more business owners. Like a sole proprietorship, a GP is the default entity if two or more people join to conduct business without registering.

The key drawback is personal liability: a company cannot issue any stock, and partners are held personally liable for any taxes or debts.

🤝 Liaison Tip: If you're starting a business with a co-founder, consult your liaison to draft a clear, comprehensive Partnership Agreement before you start. This agreement is essential, as it defines roles, responsibilities, and how to dissolve the partnership, mitigating the risk inherent in this structure.

• Ease of establishment: Minimal fees and paperwork.
• Management flexibility: Partners define their own roles and management structure.

• Instability upon partner exit: Departure or death of a partner can dissolve the partnership.
• Joint and several Liability: All partners share responsibility for the business’s debts.
• Personal asset risk: Partners’ personal assets are at risk.

Limited Partnerships (LPs) are owned by two or more individuals and benefit from pass-through taxation. The pivotal distinction is the role of limited partners, who enjoy protection from the business’s debts beyond their investment amount.

Every LP must have at least one general partner who bears unlimited liability and typically runs the day-to-day operations.

• Limited liability for limited partners: Personal assets are protected beyond their investment.
• Attracting investors: Attractive to silent investors who prefer to fund the business without getting involved in daily operations.

• Limited influence for limited partners: They often relinquish control over daily operations.
• Unlimited liability for general partners: They are fully responsible for the business’s debts and obligations.

LLPs are a hybrid of GPs and LPs, typically owned by licensed professionals (like lawyers or accountants). Partners are responsible for their own actions but are not personally liable for the conduct of their partners or the business’s general debts.

• Personal liability protection: Protection from liabilities arising from other partners' mistakes.
• Autonomy in management: Partners can manage their individual practices within the larger partnership.

• Restricted availability: LLPs are typically reserved for licensed professionals.
• Varying state regulations: Compliance can be complicated for interstate business.

A Sole Proprietorship is the default entity type when one owner starts a business without formally registering as another entity. The owner and the business are considered the same for legal and tax purposes.

🚨 Critical Warning: This is the riskiest structure. The owner is liable for all losses, legal issues, and debts the business accrues. Your prison liaison will strongly urge you to avoid this structure if you have the budget to create an LLC or another structure that offers personal liability protections.

• Simplicity in formation: Often requires no more than a business license.
• Complete control: The owner has full autonomy in making all decisions.

• Personal liability exposure: The owner's home and savings are at risk for business debts.
• Challenges in raising funds: Cannot issue stock, making it difficult to secure investment.

C-corps offer the most asset protection and tax-related options. They are the legal entity preferred by nearly all investors and the most common structure for publicly traded companies. If you anticipate needing investor capital (venture funding), the C Corp structure is often the required choice.

• Personal liability protection: Shareholders are not personally liable for business debts.
• Unlimited shareholders: Allows for significant growth and investment.

• Double taxation: Profits are taxed at the corporate level and again as dividends to shareholders.
• Complex formation and maintenance: Requires considerable paperwork, bylaws, and formal meetings.

An S Corp is a tax election a company can choose when forming an LLC or a C Corp. It is usually done to avoid the double taxation issue impacting C Corps, as all profits or losses are passed through to the owners and are only taxed once.

• Liability protections: Enjoys the same personal liability protections as C Corps.
• Tax benefits: A possible lower tax rate by avoiding some payroll taxes on distributions.

• Restrictions on ownership: Must be U.S. citizens/residents, and limited to 100 shareholders.
• Rigorous IRS oversight: Strict regulations ensure compliance to maintain the status.

Nonprofits operate for charitable, educational, or cultural purposes. They are designed to serve the public good rather than generate profit for owners. To be recognized, they must be established with a clear mission that benefits the community.

• Tax exemptions: Don’t pay federal income tax on revenue related to their nonprofit purpose.
• Liability protections: Offers personal liability protection for directors and officers.

• Restrictions on profit distribution: Profits must be reinvested into the mission.
• Challenges in raising capital: Rely heavily on unpredictable donations and grants.

A co-operative (co-op) is based on shared ownership and democratic control, where members are both the owners and the customers. Co-ops operate on a one-member, one-vote principle.

• Democratic governance: Members have an equal say in the business.
• Shared economic benefits: Profits are distributed among members based on involvement.

• Complex decision-making: Reaching a consensus among all members can be slow.
• Limited investment opportunities: Cannot issue stock like corporations.

B Corporations (B Corps) are certified by a nonprofit entity, B Lab, for meeting rigorous standards of social and environmental performance, accountability, and transparency. They balance profit with purpose, aiming to benefit all stakeholders—employees, communities, and the environment.

• Enhanced credibility: Signals a commitment to social and environmental ethics.
• Attracting talent and investment: Appeals to top talent and socially responsible investors.

• Certification process: Achieving and maintaining certification is rigorous and time-consuming.
• Potential for higher costs: Commitment to sustainability can result in higher operational costs.

A Joint Venture (JV) is a strategic alliance where two or more distinct entities agree to collaborate on a specific project or business activity for a set duration. It's often used to leverage complementary strengths and share risks.

• Combined resources and expertise: Partners pool knowledge and assets.
• Shared risk: Financial and operational risks are distributed among partners.

• Complexities in management: Aligning different cultures and management styles can be challenging.
• Limited control: Partners must compromise on autonomy for shared control.