Why Business Structure Matters

Business structure determines liability exposure, tax treatment, registration requirements, and verification complexity. Each structure carries different risk signals and requires tailored verification approaches.

Sole Proprietorship

An unincorporated business owned and operated by a single individual.

Key characteristics:

No separate legal entity - the business and owner are legally the same
Often not registered with Secretary of State (except for DBAs/trade names)
Uses the owner's Social Security Number (SSN) as the Tax ID, not a separate EIN
No liability protection - owner is personally responsible for all debts
Common among freelancers, consultants, and very small businesses

Verification Challenge: Since many sole proprietorships don't register with the state, traditional KYB methods (SoS lookups) won't find them. Alternative verification methods include TIN/EIN validation with the IRS and web presence analysis - review our Sole Prop Verification guide for more details.

Partnerships

General Partnership (GP)

Two or more owners who share profits and liabilities
No formal registration required in most states (though recommended)
Partners have unlimited personal liability

Limited Partnership (LP)

Has both general partners (unlimited liability) and limited partners (liability limited to investment)
Must be registered with the state

Limited Liability Partnership (LLP)

Common among professional services (law firms, accounting firms)
Partners have limited liability protection
Must be registered with the state

Limited Liability Limited Partnership (LLLP)

Provides liability protection to both general and limited partners
Less common, available in select states

Limited Liability Company (LLC)

The most popular business structure for small to medium businesses:

Provides liability protection (owners' personal assets are separate)
Flexible tax treatment (can be taxed as sole proprietorship, partnership, or corporation)
Less formal than corporations (fewer compliance requirements)
Owners are called "members," managed by members or appointed managers
Must be registered with the state

Corporations

C Corporation (C Corp)

Separate legal entity with unlimited lifespan
Owners (called shareholders) have limited liability
Subject to corporate income tax (double taxation: corporate profits + shareholder dividends)
Can have unlimited shareholders
Common structure for larger businesses and those seeking investment
Must file articles of incorporation with the state to register

S Corporation (S Corp)

An S Corporation is a C Corporation that has elected special tax treatment with the IRS. It provides corporate liability protection while avoiding double taxation.

S Corp status is a tax election, not a structural difference visible in SoS records. The business appears as a standard corporation in state registries. S Corp status is confirmed through IRS records, not Secretary of State data (although a select number of states report the distinction between S Corp and C Corp).

The optimal way to verify the S Corp election of a business is to request the 1120S form.

Characteristics:

Formed as a regular corporation with the state (articles of incorporation)
Files Form 2553 with the IRS to elect S Corp tax status
Business profits and losses "pass through" to shareholders' personal tax returns
Shareholders pay individual income tax on their share of profits (whether distributed or not)
No corporate-level income tax

Key restrictions:

Limited to 100 shareholders, must be US citizens/residents
More restrictions than C Corps
Only one class of stock allowed (can't have preferred stock with different rights)
Shareholders must be individuals, estates, or certain trusts (not corporations or partnerships)
Certain businesses ineligible (financial institutions, insurance companies, international sales corps)

B Corporation (B Corp or Benefit Corporation)

For-profit corporation with social/environmental mission
Directors are legally required to consider impact on stakeholders beyond shareholders
Available in select states with specific registration requirements

Nonprofit Organizations

Organizations that operate for public benefit rather than profit distribution:

501(c)(3) and other IRS designations for tax-exempt status
Must register with state Secretary of State
Different compliance and reporting requirements
Governed by a board of directors rather than owners/shareholders

Professional Entities

Professional Corporation (PC) / Professional Association (PA)

Structures specifically for licensed professionals - doctors, lawyers, dentists, accountants, architects.

Similar to standard corporations but with specific state requirements
Liability protection for business debts (but not for professional malpractice)
All shareholders must hold required professional licenses

Requirements differ significantly by state and profession

Trusts

Legal arrangements where trustees hold assets for beneficiaries. Can own businesses or operate as business entities.

Complex registration and tax treatment varies by trust type
Multiple categories of trusts (revocable, irrevocable, business trusts, etc.)
Uncommon as primary operating business structure

Trust structures can obscure beneficial ownership. They usually require additional documentation to identify controlling parties.

Trade Names (DBAs - "Doing Business As")

"Doing Business As" names are not business structures - they're registered names that allow entities to operate under names different from their legal name.

They allow a business to operate under a name different from its legal name:

Example: "John Smith" (sole proprietor) might register "Smith's Consulting Services" as a DBA
Registered at state or county level depending on jurisdiction
Does not create a separate legal entity
Multiple businesses can use similar DBAs in different jurisdictions.

Why Structure Matters for Verification

Registration requirements: Some structures must register with SoS (LLCs, corporations), others don't (sole props, general partnerships). This determines which verification methods work.

Liability and risk profile: Limited liability structures protect owners personally, affecting credit risk assessment. Unlimited liability structures tie business and personal finances together.

Age and sophistication signals: Business structure often correlates with maturity and complexity. Brand new Delaware C Corps with no operations may signal different intent than established local LLCs.

Tax implications: Structure affects how income is reported and taxed, which impacts financial analysis and document requirements during underwriting.