What Are the Different Types of Business Entities, and Which One Is Right for You?
Starting a business comes with a long list of decisions, and one of the first is choosing the right legal structure. The type of business entity you choose affects everything from daily operations and taxes to your level of personal liability. Whether you're starting a side hustle or launching a large-scale operation, your business structure lays the foundation.
Entrepreneurs have several options for their business structure, each with its own pros and cons. Choosing the right one means thinking carefully about your goals, the risks involved, and how you want to manage your venture. At the Law Office of Justin S. Eppler, LLC in Anchorage, Alaska, we can help you make a choice that fits your vision.
Sole Proprietorship
A sole proprietorship is the most straightforward type of business structure. It’s typically used by individuals running small, low-risk businesses or offering services on a freelance basis. The key features of a sole proprietorship include:
Full control: You make all the decisions and keep all the profits.
Pass-through taxation: Business income is reported on your personal tax return.
Easy setup: In most cases, all you need is a local business license.
Personal liability: You’re personally responsible for all business debts and legal actions.
This option works well if you're just starting out or testing a business idea. However, because your personal assets aren’t protected, it may not be ideal if you expect significant liability or plan to hire employees.
General Partnership
If you’re going into business with one or more people, a general partnership might be your starting point for a business structure. Like sole proprietorships, partnerships are relatively simple to form. Some common characteristics of general partnerships include:
Shared ownership: All partners contribute to the business and share profits, losses, and management duties.
Pass-through taxation: Profits and losses pass through to partners’ personal tax returns.
Joint liability: Each partner is personally liable for the business’s obligations, even those created by another partner.
Flexible structure: You can decide how to divide responsibilities and profits.
Partnerships work best when there’s a high level of trust and clear communication between partners. It's also smart to draft a partnership agreement early on to set expectations and avoid future disputes.
Limited Partnership (LP) and Limited Liability Partnership (LLP)
For business owners seeking to attract investors or limit liability, LPs and LLPs provide more structure than a general partnership. While they’re similar, they serve different purposes. Here are a few features of a limited partnership:
Two types of partners: General partners manage the business and carry liability; limited partners invest money but aren’t involved in daily operations.
Liability limits: Limited partners are only liable for the amount they invest.
Formal filing: LPs require registration with the Alaska Division of Corporations.
Here are some features of a limited liability partnership:
Shared management: All partners usually have the right to manage the business.
Limited liability: Each partner is protected from personal liability for the actions of other partners.
Popular among professionals: LLPs are often used by lawyers, accountants, and architects.
Both LPs and LLPs offer more protection than a general partnership and can be tailored to fit specific goals and responsibilities.
Limited Liability Company (LLC)
LLCs are a popular business structure for businesses of all sizes because they offer the benefits of both corporations and partnerships without too much red tape. In Alaska, forming an LLC requires filing Articles of Organization and meeting state requirements for annual reporting.
Some of the advantages of an LLC include:
Personal asset protection: Owners (called members) aren’t personally liable for business debts.
Flexible tax options: You can choose to be taxed as a sole proprietor, partnership, or corporation.
Simple management structure: Members can manage the business directly or appoint managers.
Credibility: Customers and partners may take your business more seriously.
LLCs are a great option for many business owners in Alaska because they offer flexibility while still protecting your personal assets. They're especially useful for small and mid-sized businesses.
Corporation (C Corporation)
If you're planning to build a business that could grow significantly or attract investors, forming a C corporation may be the right move. While more paperwork is involved, this entity type offers the most protection and potential for raising capital. The key characteristics of C corporations are:
Separate legal entity: The corporation exists independently of its owners (shareholders).
Limited liability: Shareholders aren’t personally responsible for business debts.
Ability to raise funds: Corporations can issue stock to raise capital.
Double taxation: Profits are taxed at the corporate level and again when distributed as dividends.
Because of the filing requirements, regulatory standards, and tax structure, C corporations are typically suited for larger businesses or those planning to go public.
S Corporation
An S corporation is a special type of corporation that avoids double taxation by passing income directly to shareholders. In Alaska, your business must first register as a C corporation before electing S corporation status with the IRS. Some of the notable benefits of an S corporation include:
Pass-through taxation: Income is taxed at the shareholder level, not the corporate level.
Asset protection: Like other corporations, personal assets are shielded from business debts.
Salary and dividends: Owners can pay themselves a salary and receive distributions, potentially lowering self-employment tax.
However, there are restrictions on who can be a shareholder. Only U.S. citizens or residents can qualify, and there’s a limit on the number of shareholders (100 or fewer). This structure works well for small-to-mid-sized businesses that want the liability protection of a corporation without facing corporate income tax.
Nonprofit Corporation
If your goal is to serve a mission rather than make a profit, a nonprofit corporation may be right for you. This structure is used by charitable, religious, educational, and scientific organizations. In Alaska, you’ll need to file Articles of Incorporation and apply for tax-exempt status through the IRS. Here are a few key traits of nonprofit corporations:
Mission-focused: Profits must support the organization’s purpose rather than be distributed to members or directors.
Tax-exempt status: Approved nonprofits don’t pay federal income tax and may qualify for state and local exemptions.
Formal governance: Must have a board of directors and follow specific reporting and operational rules.
Public accountability: Nonprofits are required to share certain financial information with the public.
If you’re driven by a purpose bigger than profit and want to establish a long-lasting impact, forming a nonprofit might be the right path.
Professional Corporation (PC)
Certain professionals—like doctors, lawyers, and engineers—are required to form a professional corporation in order to offer services through a business entity. Alaska allows professionals to form a PC as long as all shareholders are licensed in the same profession. Some typical features of a professional corporation business structure include:
Restricted ownership: Only licensed professionals can own and operate the business.
Liability protection: Offers limited personal liability for business debts, but not for malpractice.
Tax options: PCs are taxed like C corporations unless they elect S corporation status.
Formal operation: Requires bylaws, board meetings, and annual filings.
A professional corporation helps protect owners from financial liability tied to business operations, but each individual remains responsible for their own professional conduct.
Customized Legal Assistance
Choosing the right business structure is one of the most important steps you’ll take as an entrepreneur. The right legal guidance can help you build a business that’s positioned to thrive. At the Law Office of Justin S. Eppler, LLC, we serve clients in Fairbanks, Juneau, Wasilla, Palmer, and Anchorage, Alaska. Reach out to us today to get started with a consultation.
