Chapter 3: Business Structures and the Business Plan
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After completing this chapter, you will be able to:
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Two of the most consequential early decisions a small business owner makes are choosing a legal structure and writing a business plan. These are not bureaucratic formalities. The business structure chosen directly affects how much of your personal assets are at risk, how the business is taxed, who has decision-making authority, and how potential lenders and investors evaluate you. The business plan documents your strategy and serves as a reference point for every major decision that follows.
This chapter covers the major business structures available to small business owners in the United States, the key components of a business plan, and the professional advisors who can help you navigate both.
3.1 Choosing a Business Structure
One of the most important initial decisions a small business owner makes, from a legal perspective, is the legal organization of the business, called the business structure or entity selection. The available choices include traditional structures such as corporations, partnerships, and sole proprietorships, and hybrid entities such as limited liability companies (LLCs), limited liability partnerships (LLPs), and joint ventures. Each carries different requirements to establish, different tax and regulatory obligations, and varying levels of personal risk and legal protection.
Business structure options should be evaluated not just for where the business is today, but for where it might go. The structure chosen at the outset will shape how the business grows, how authority is organized, and how capital can be raised. Because business needs evolve, the structure can and often should change as the venture grows. Legal and tax advice from a qualified professional is strongly recommended before making this decision.
Corporations
A corporation is a complex business structure created by filing formal documents, typically called articles of incorporation, with the appropriate state agency. A corporation operates as a separate legal entity apart from its owners, who are called shareholders. Like an individual, a corporation can sue and be sued, own property, enter into contracts, and borrow money. One of the primary advantages of incorporating is limited liability: the corporation shields its owners from personal responsibility for most of the company’s legal and financial obligations.
Corporations require more administrative formality than other structures. They must maintain bylaws, hold annual shareholder and director meetings, keep minutes of major decisions, and maintain separate bank accounts and financial records. Corporations are the only business entity permitted by law to sell shares of stock, making them well-suited to businesses that plan to raise capital from outside investors.
C Corporations, S Corporations, and B Corporations
The distinction between C corporations and S corporations is primarily a tax distinction. An S corporation is a “pass-through” entity: shareholders report the business’s profits as their own income and pay personal income taxes on it, avoiding double taxation. A C corporation is taxed at the corporate level, and then again at the individual level if corporate income is distributed to shareholders as dividends.
A B corporation (Benefit corporation) is a distinction based on purpose rather than taxes. A certified B corporation meets high standards of social and environmental performance, transparency, and accountability, balancing profit with a broader social mission. B corporations can be organized as either C corporations or S corporations.
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Tax Treatment |
Taxed at the corporate level. Shareholders also pay personal tax on dividends received — known as double taxation. |
Pass-through taxation. Profits and losses are reported on shareholders’ personal tax returns. No corporate-level tax. |
Organized as either a C corp or S corp. Tax treatment follows the underlying structure chosen. |
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Ownership |
Unlimited shareholders. Can issue multiple classes of stock. Open to foreign investors. |
Maximum 100 shareholders. One class of stock only. Shareholders must be U.S. citizens or residents. |
No specific ownership restrictions beyond those of the underlying C or S corp structure. |
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Best For |
Businesses seeking outside investment, planning to go public, or operating at large scale. |
Small to mid-sized, privately held businesses that want liability protection and tax efficiency without double taxation. |
Businesses that want to balance profit with a formal commitment to social or environmental goals. |
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Real-World Example |
Apple Inc. — publicly traded on NASDAQ, pays corporate taxes, distributes dividends to millions of shareholders worldwide. |
Clear Capital — a real estate valuation technology company headquartered in Reno, Nevada. In a 2020 interview, CEO Duane Andrews confirmed the company's structure, noting that as an S corporation headquartered outside California, it benefited from favorable tax treatment (Andrews, as cited in Reno Gazette Journal, June 2020)." |
Patagonia — certified B corporation committed to environmental sustainability, donates profits to environmental causes. |
Partnerships and Joint Ventures
A partnership is a business entity formed by two or more individuals or entities, each of whom contributes something of value (capital, equipment, or skills) and shares in the profits and losses. In a general partnership, each partner bears personal liability for the obligations of the partnership as a whole. A limited partnership (LP) includes at least one general partner, who bears full personal liability, and one or more limited partners, whose liability is generally capped at their investment.
A joint venture is essentially a temporary partnership between two businesses formed to pursue a shared goal or project. The parties share costs, risks, and any resulting revenue.
Sole Proprietorships
A sole proprietorship is a business owned and managed by one individual, with very little formal structure and no required state filing. It is the simplest and least expensive business structure to create, and the most common form of small business in the United States. The owner, called a sole proprietor, and the business are legally the same entity, meaning the owner is personally liable for all debts and legal obligations. All business profits and losses are reported on the owner’s personal tax return using a Schedule C form.
A sole proprietor may also operate under a doing business as (DBA) name, an assumed business name filed with the relevant government office. A DBA does not provide any of the liability protections associated with a corporation or LLC, even if the assumed name includes words like “Inc.” or “LLC.”
Limited Liability Companies (LLCs)
A limited liability company (LLC) is a hybrid structure that combines the liability protection of a corporation with the flexibility and simpler administration of a partnership. The owners of an LLC are called members, and the LLC’s key advantage is that members are generally protected from personal liability for the business’s debts and legal obligations, as long as they keep business and personal finances separate.
Compared to corporations, LLCs are easier to form and maintain. They require filing articles of formation with the state and creating an operating agreement, but far fewer ongoing regulatory formalities. Nevada is particularly well-regarded for its LLC laws, offering strong liability protections and privacy provisions. Small business owners in Nevada can begin the formation process through the Nevada Secretary of State’s office at nvsos.gov/sos/businesses/start-a-business.
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A friend wants to start a mobile pet grooming service in Las Vegas. She plans to work alone, at least initially, and wants to keep startup costs low. She is trying to decide between operating as a sole proprietorship or forming an LLC. What are the key trade-offs she should consider? What additional information would you want to know before making a recommendation? |
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3.2 The Business Plan
A business plan is a formal document used for the long-range planning of a company’s operation. It typically includes background information, a market analysis, financial projections, and a summary of the business strategy. Investors nearly always request a formal business plan, and banks and other lenders require one to assess loan applications. Business plans usually project financial data over a three-year period and can range from a few pages to twenty-five or more, depending on the purpose and audience.
Most business plans include the following key components:
- Executive summary — An overview of the entire business plan, written after the other sections are complete. It highlights the most significant points and should be compelling enough to motivate the reader to keep reading.
- Vision and mission statement — A concise description of the business’s intended direction and underlying philosophy. Company values are often included here.
- Company overview — The type of business (manufacturing, retail, service), background information if the business already exists, and the proposed legal structure. Includes company name, location, objectives, and current status.
- Product and/or service plan — A description of what the business offers, its unique features, why customers will buy it, and any available legal protections such as patents or trademarks.
- Marketing plan — An analysis of the target market and customer profile, the competitive landscape, the marketing and sales strategy, pricing, and the projected marketing budget.
- Management plan — Identification of the key people involved, active investors, the management team, board members, and advisors, along with their relevant experience and qualifications.
- Operating plan — A description of how the business will function day to day, including facilities, equipment, staffing, quality control, inventory management, and supply chain.
- Financial plan — A detailed projection of revenues, costs, and profits, typically over three to five years. Includes pro forma financial statements, a breakeven analysis, and the planned sources of financing.
- Appendix of supporting documents — Additional materials that support the plan, such as management biographies, detailed competitive analysis, customer research, or testimonials.
Business plans should be treated as living documents, reviewed and updated regularly as the business grows and the market changes. Comparing actual results against the plan’s projections tells you whether you are on track and where adjustments are needed. It is both a road map and a measuring stick.
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3.3 Key Advisors for Your Business
No small business owner succeeds entirely on their own. The most effective owners build a team of trusted advisors who bring expertise the owner doesn’t have or can’t afford to maintain in-house. Choosing the right advisors early, before problems arise, is one of the most valuable investments a small business owner can make.
Think of it this way: a quarterback depends as much on the offensive line as on the receivers. A surgeon needs nurses and anesthesiologists. The business owner who recognizes the limits of their own expertise and builds relationships with the right professionals is better equipped to make sound decisions under pressure.
Accountant
One of the most important early decisions a small business owner makes is hiring a skilled accountant. Before approaching any investor, lender, or vendor, a new owner’s personal financial history is the only financial picture those parties can evaluate. Having professionally prepared tax returns in hand establishes credibility and signals sound financial management. A skilled accountant helps create pro forma financial documents, set up bookkeeping procedures, manage payroll, file taxes, and provide ongoing financial guidance.
Attorney
Getting legal advice early, even in the idea development stage, is far less expensive than addressing legal problems after they arise. An attorney can help with entity selection, contract review, intellectual property protection, employment law compliance, and a wide range of other issues that affect small businesses.
Attorneys range from generalists who handle many areas of law to specialists with deep expertise in a specific field. For most new small business owners, a generalist with experience working with small businesses is a practical starting point. When specialized expertise is needed, for a complex real estate transaction, an employment dispute, or intellectual property filing, a referral to a specialist is appropriate.
Before engaging an attorney, ask how they bill for their services. Some charge flat rates for specific tasks; others bill by the hour and add expenses separately. Understanding the fee structure upfront avoids surprises later.
Banker or Financial Institution
Not all banks are the same, and the right banking relationship depends on the size and geographic scope of your business. Local community banks are often well-suited to small, locally focused businesses. Some credit unions also offer business banking services, though availability varies by institution and membership eligibility requirements differ. Officers at a local institution may know the business owner personally, understand the local market, and be more willing to make lending decisions based on reputation and relationship rather than purely on data.
As a business grows, banking needs change. A business that starts in one part of Las Vegas and expands into Henderson, Summerlin, or the northwest valley may outgrow the capabilities of a smaller institution. Reviewing banking arrangements as the business grows is a practical step many owners overlook until a need arises. Establishing a relationship before you need a loan, opening accounts, demonstrating financial discipline, and communicating regularly with a business banker, puts you in a stronger position when it is time to seek financing.
Insurance Agent
Insurance is important for almost every small business, and a knowledgeable insurance agent brings access to data and expertise that most business owners don’t have on their own. Agents can assess the risks specific to your industry, identify the types of coverage that apply to your business, and help you find appropriate coverage at a reasonable cost.
One practical tool insurance professionals use is the North American Industry Classification System (NAICS), a federal coding system that categorizes businesses by type. Insurance premiums are often tied to the risk level associated with a business’s NAICS classification. An agent familiar with your industry can help you understand your classification and ensure you are appropriately covered.
Industry Expert
Industry expertise and practical knowledge are among the most important factors in successfully launching and operating a small business. Research suggests that roughly 15 to 20 percent of successful small business owners had no prior industry experience before starting, but even those owners typically sought out mentors, advisors, or consultants with the relevant knowledge they lacked.
SCORE (formerly the Service Corps of Retired Executives) is a national nonprofit that provides free mentoring and business advice to small business owners through a network of volunteer business professionals. SCORE mentors can be matched by industry expertise, making them a particularly valuable resource for new owners seeking practical guidance from someone who has worked in their field. Connecting with an industry expert early, whether through a professional association, a small business development center, a SCORE mentor, or personal networking, provides insight into the skills, standards, and pitfalls specific to your field.
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A first-time restaurant owner in Las Vegas is preparing to open a small neighborhood café. She has culinary experience but has never run a business. Of the five advisors discussed in this section: accountant, attorney, banker, insurance agent, and industry expert, which would you recommend she engage first, and why? Which could wait, and under what circumstances? |
Key Resources for Small Business Owners
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Nevada Secretary of State |
Business formation, LLC filing, registered agent requirements, and business name search for Nevada businesses. |
nvsos.gov/sos/businesses/start-a-business |
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SCORE |
Free mentoring from experienced business professionals, matched by industry. Workshops, templates, and online resources also available. |
score.org |
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Small Business Development Centers (SBDCs) |
Free and low-cost consulting, business planning assistance, and training. Nevada SBDC serves businesses statewide. |
nsbdc.org |
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NAICS Database |
Federal business classification system used by insurance professionals, lenders, and government agencies to categorize businesses by type. |
census.gov/naics |
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SBA — Small Business Administration |
Federal resources for starting, managing, and growing a small business, including loan programs, contracting opportunities, and guides. |
sba.gov |
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Watch and Reflect
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▶ Watch: LLC vs. Sole Proprietorship vs. S Corp: What's the Difference? Source: ADP | YouTube Link: YouTube Note: This video is produced by ADP, a payroll and HR services company. The final 25 seconds include a product pitch. The content itself is solid and worth your attention. Victoria Jordan, founder and Executive Creative Director of Pureworks, LLC, walks through the practical differences between three common business structures: sole proprietorship, LLC, and S corporation. She covers personal liability, tax treatment, and the paperwork requirements for each, framing the decision the way a real business owner thinks about it. After watching, consider the following reflection questions:
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Check Your Understanding
Use the following questions to test your comprehension of this chapter.
- A friend wants to start a mobile food service in Las Vegas and is trying to decide between a sole proprietorship and an LLC. What questions would you ask before making a recommendation? What are the key trade-offs between the two structures for this type of business?
- The business plan is described as a “road map” that should be reviewed and updated regularly. Given that markets change rapidly, why do you think lenders and investors still require a formal business plan? What does it signal to them beyond just the financial projections?
- Of the five key advisors, accountant, attorney, banker, insurance agent, and industry expert, which do you think is most important for a small business owner to engage before opening? Defend your choice.
- B corporations are required to balance profit with social and environmental performance. Do you think this model is sustainable for small businesses, or is it better suited to larger companies? Can you think of a Las Vegas area business that seems to operate with a similar values-driven mission?
- The chapter notes that business plans should be treated as living documents. If you were running a small business and your actual results were consistently below projections, what would you do? Would you revise the plan, or push harder to meet the original targets? What factors would influence your decision?
Key Terms
Articles of incorporation — The formal documents filed with a state agency to create a corporation.
B corporation (Benefit corporation) — A business that meets high standards of social and environmental performance, transparency, and accountability, balancing profit with a broader social mission.
Business plan — A formal document describing a business’s strategy, market, operations, management, and financial projections, typically covering a three-to-five-year period.
C corporation — A standard corporation taxed at the corporate level, with distributions to shareholders taxed again at the individual level.
Corporation — A business structure that operates as a separate legal entity from its owners, providing limited liability and the ability to sell stock.
DBA (doing business as) — An assumed business name used by a sole proprietor or other entity. Does not provide liability protection.
Entity selection — The choice of legal business structure, affecting liability, taxation, management authority, and the ability to raise capital.
General partnership — A business formed by two or more parties who share management, profits, and losses, with each partner bearing personal liability.
Joint venture — A temporary partnership between two businesses formed to pursue a shared goal, sharing costs, risks, and potential rewards.
Limited liability company (LLC) — A hybrid business structure combining the liability protection of a corporation with the simpler administration of a partnership.
Limited partnership (LP) — A partnership with at least one general partner bearing full personal liability and one or more limited partners whose liability is capped at their investment.
S corporation — A pass-through tax entity in which business profits are reported on shareholders’ personal tax returns, avoiding double taxation.
SCORE — A national nonprofit organization that provides free mentoring and business advice to small business owners through a network of volunteer business professionals.
Shareholder — An owner of a corporation who holds shares of stock representing a proportional ownership interest.
Sole proprietor — The owner of a sole proprietorship; legally the same entity as the business, bearing full personal liability.
Sole proprietorship — The simplest business structure, owned and managed by one individual, with no required state filing and no separation between owner and business.
References
Andrews, D. (2020, June). [Interview]. Reno Gazette Journal. Retrieved from NewsBank.
Nevada Secretary of State. (n.d.). Start a business in Nevada.
OpenStax. (n.d.). Entrepreneurship. (Licensed CC BY 4.0)
OpenStax. (n.d.). Introduction to business. (Licensed CC BY 4.0)
U.S. Census Bureau. (n.d.). North American Industry Classification System (NAICS).
Woodhull-Smith, M. (2024). Introduction to entrepreneurship. NC State Pressbooks. (Licensed CC BY-NC-SA 4.0)