what is a legal structure in a business plan

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How to Choose the Best Legal Structure for Your Business

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Choosing the right legal structure is a necessary part of running a business. Whether you're just starting out or your business is growing, it's crucial to understand the options.

Table of Contents

Your business’s legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board. [Related article: What to Do if Your Business Gets Sued ]

We’ll explore business legal structures and how to choose the right structure for your organization. 

What is a business legal structure?

A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can have liability ramifications.

Why is a business legal structure important?

Choosing the right business structure from the start is among the most crucial decisions you can make. Here are some factors to consider:

• Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
• Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does not recognize LLC structures; they exist only on a state level. C corporations are a federal business structure that includes the liability protection of LLCs.
• Paperwork: Each business legal structure has unique tax forms. Additionally, if you structure your company as a corporation, you’ll need to submit articles of incorporation and regularly file certain government reports. If you start a business partnership and do business under a fictitious name, you’ll need to file special paperwork for that as well.
• Hierarchy: Corporations must have a board of directors. In certain states, this board must meet a certain number of times per year. Corporate hierarchies also prevent business closure if an owner transfers shares or exits the company, or when a founder dies . Other structures lack this closure protection.
• Registration: A business legal structure is also a prerequisite for registering your business in your state. You can’t apply for an employer identification number (EIN) or all your necessary licenses and permits without a business structure.
• Fundraising: Your structure can also block you from raising funds in certain ways. For example, sole proprietorships generally can’t offer stocks. That right is primarily reserved for corporations.
• Potential consequences for choosing the wrong structure: Your initial choice of business structure is crucial, although you can change your business structure in the future. However, changing your business structure can be a disorganized, confusing process that can lead to tax consequences and the unintended dissolution of your business. 

Types of business structures

The most common business entity types are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here’s more about each type of legal structure.

Sole proprietorship

A sole proprietorship is the simplest business entity. When you set up a sole proprietorship , one person is responsible for all a company’s profits and debts.

“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, vice president and general manager of business acquisitions at Deluxe Corp. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

Proprietorship costs vary by market. Generally, early expenses will include state and federal fees, taxes, business equipment leases , office space, banking fees, and any professional services your business contracts. Some examples of these businesses are freelance writers, tutors, bookkeepers , cleaning service providers and babysitters.

A sole proprietorship business structure has several advantages.

• Easy setup: A sole proprietorship is the simplest legal structure to set up. If you – and only you – own your business, this might be the best structure. There is very little paperwork since you have no partners or executive boards.
• Low cost: Costs vary by state, but generally, license fees and business taxes are the only fees associated with a proprietorship.
• Tax deduction: Since you and your business are a single entity, you may be eligible for specific business sole proprietor tax deductions , such as a health insurance deduction.
• Easy exit: Forming a proprietorship is easy, and so is ending one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a daycare center and wish to fold the business, refrain from operating the day care and advertising your services.

The sole proprietorship is also one of the most common small business legal structures. Many famous companies started as sole proprietorships and eventually grew into multimillion-dollar businesses. These are a few examples:

• Marriott Hotels

Partnership 

A partnership is owned by two or more individuals. There are two types: a general partnership, where all is shared equally, and a limited partnership, where only one partner has control of operations and the other person (or persons) contributes to and receives part of the profits. Partnerships can operate as sole proprietorships, where there’s no separation between the partners and the business, or limited liability partnerships (LLPs), depending on the entity’s funding and liability structure.

“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner – like running a restaurant or agency together,” Sweeney said. “A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made as well as those actions made by your business partner.”

General partnership costs vary, but this structure is more expensive than a sole proprietorship because an attorney should review your partnership agreement. The attorney’s experience and location can affect the cost. 

A business partnership agreement must be a win-win for both sides to succeed. Google is an excellent example of this. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading global search engine. The co-founders met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 11.4% of Google provides them with a total net worth of nearly $226.4 billion.

Business partnerships have many advantages. 

• Easy formation: As with a sole proprietorship, there is little paperwork to file for a business partnership. If your state requires you to operate under a fictitious name ( “doing business as,” or DBA ), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. You’ll usually need a business license as well.
• Growth potential: You’re more likely to obtain a business loan with more than one owner. Bankers can consider two credit histories rather than one, which can be helpful if you have a less-than-stellar credit score.
• Special taxation: General partnerships must file federal tax Form 1065 and state returns, but they do not usually pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, affecting each partner’s business share and contribution. If you brought the most seed capital for the business, you and your partner may agree that you’ll retain a higher share percentage, making you the majority owner.

Partnerships are one of the most common business structures. These are some examples of successful partnerships:

• Warner Bros.
• Hewlett-Packard
• Ben & Jerry’s

Limited liability company 

A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying a partnership’s tax and flexibility benefits. Under an LLC, members are shielded from personal liability for the business’s debts if it can’t be proven that they acted in a negligent or wrongful manner that results in injury to another in carrying out the activities of the business.

“Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns,” said Brian Cairns, CEO of ProStrategix Consulting. “LLCs can have one or more members, and profits and losses do not have to be divided equally among members.”

The cost of forming an LLC comprises the state filing fee and can vary depending on your state. For example, if you file an LLC in New York, you must pay a $200 filing fee, a $9 biennial fee, and file a biennial statement with the New York Department of State .

Although small businesses can be LLCs, some large businesses choose this legal structure. The structure is typical among accounting, tax, and law firms, but other types of companies also file as LLCs. One example of an LLC is Anheuser-Busch, one of the leaders in the U.S. beer industry. Headquartered in St. Louis, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewing company based in Leuven, Belgium.

Here some other well-known examples of LLCs:

• Hertz Rent-a-Car

Corporation 

The law regards a corporation as separate from its owners, with legal rights independent of its owners. It can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category. 

There are several types of corporations, including C corporations , S corporations, B corporations, closed corporations, and nonprofit corporations.

• C corporations: C corporations, owned by shareholders, are taxed as separate entities. JPMorgan Chase & Co. is a multinational investment bank and financial services holding company listed as a C corporation. Since C corporations allow an unlimited number of investors, many larger companies – including Apple, Bank of America and Amazon – file for this tax status.
• S corporations: S corporations were designed for small businesses. They avoid double taxation, much like partnerships and LLCs. Owners also have limited liability protection. Widgets Inc. is an example of an S corporation that operates very simply: Employee salaries are subject to FICA tax (as are all employee salaries), while the distribution of additional profits from the S corporation does not incur further FICA tax liability. [Learn more about FICA taxes for small businesses .]
• B corporations: B corporations, otherwise known as benefit corporations, are for-profit entities committed to corporate social responsibility and structured to positively impact society. For example, skincare and cosmetics company The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.
• Closed corporations: Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held companies, have more flexibility than publicly traded companies. For example, Hobby Lobby is a closed corporation – a privately held, family-owned business. Stocks associated with Hobby Lobby are not publicly traded; instead, the stocks have been allocated to family members.
• Open corporations: Open corporations are available for trade on a public market. Many well-known companies, including Microsoft and Ford Motor Co., are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
• Nonprofit corporations: Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These organizations all focus on something other than turning a profit.

Corporations enjoy several advantages. 

• Limited liability: Stockholders are not personally liable for claims against your corporation; they are liable only for their personal investments.
• Continuity: Corporations are not affected by death or the transferring of shares by their owners. Your business continues to operate indefinitely, which investors, creditors and consumers prefer.
• Capital: It’s much easier to raise large amounts of capital from multiple investors when your business is incorporated.

This structure is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you’ve started a shoe company and have already named your business, appointed directors and raised capital through shareholders, the next step is to become incorporated. You’re essentially conducting business at a riskier, yet more lucrative, rate. Additionally, your business could file as an S corporation for the tax benefits. Once your business grows to a certain level, it’s likely in your best interest to incorporate it.

These are some popular examples of corporations:

• General Motors
• Exxon Mobil Corp.
• Domino’s Pizza
• JPMorgan Chase

Learn more about how to become a corporation .

Cooperative

A cooperative (co-op) is owned by the same people it serves. Its offerings benefit the company’s members, also called user-owners, who vote on the organization’s mission and direction and share profits.

Cooperatives offer a couple main advantages.

• Increased funding: Cooperatives may be eligible for federal grants to help them get started.
• Discounts and better service: Cooperatives can leverage their business size, thus obtaining discounts on products and services for their members.

Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation (e.g., Inc. or Ltd.). The filing fee associated with a co-op agreement varies by state. 

An example of a co-op is CHS Inc., a Fortune 100 business owned by U.S. agricultural cooperatives. As the nation’s leading agribusiness cooperative, CHS reported a net income of $547.5 million for fiscal year 2023. These are some other notable examples of co-ops:

• Land O’Lakes
• Navy Federal Credit Union
• Ace Hardware

Factors to consider before choosing a business structure

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which structure to choose. Consider your startup’s financial needs, risk and ability to grow. It can be challenging to switch your legal structure after registering your business, so give it careful analysis in the early stages of forming your business. 

Here are some crucial factors to consider as you choose your business’s legal structure. You should also consult a CPA for advice.

Flexibility 

Where is your company headed, and which type of legal structure allows for the growth you envision? Turn to your business plan to review your goals and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential. [Learn how to write a business plan with this template .]

When it comes to startup and operational complexity, nothing is more straightforward than a sole proprietorship. Register your name, start doing business, report the profits and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits. Corporations and LLCs have various reporting requirements with state governments and the federal government.

A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means creditors and customers can sue the corporation, but they can’t gain access to any personal assets of the officers or shareholders. An LLC offers the same protection but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year.

“As a small business owner, you want to avoid double taxation in the early stages,” said Jennifer Friedman, principal at Rivetr. “The LLC structure prevents that and makes sure you’re not taxed as a company, but as an individual.”

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the effect on your return. 

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as those for Social Security and Medicare, on your personal return. 

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

Capital investment

If you need to obtain outside funding from an investor, venture capitalist or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.

Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can obtain funds only through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it’s not always necessary for the owner to use their personal credit or assets.

Licenses, permits and regulations

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

“States have different requirements for different business structures,” Friedman said. “Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you’re in. It’s not ‘one size fits all,’ and businesses may not be aware of what’s applicable to them.”

The structures discussed here apply only to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

Think about your businesses needs

When it comes to choosing the right legal structure for your business, considering your business’s needs is of the utmost importance. By prioritizing your business’s unique situation, you can choose the right structure to ensure your business can grow to the heights you envision. As it does grow, you can restructure so the legal parameters match the phase your business is in. 

Max Freedman and Matt D’Angelo contributed to this article. Source interviews were conducted for a previous version of this article.

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Types of Business Structures Explained

13 min. read

Updated January 5, 2024

The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your savings), and even your ability to raise money from angel investors or venture capitalists.

So, the structure you choose is significant.

This guide will explain the basics of common business structures, but we can’t tell you exactly which structure you should choose—if you need that kind of advice, you should consult a lawyer or an accountant.

• Sole proprietorship

The simplest business structure is the sole proprietorship. If you don’t create a separate legal entity, your business is a sole proprietorship. 

The main advantage of the sole proprietorship is that it’s relatively simple and inexpensive. The disadvantage is that it doesn’t create a legal separation between you and your personal assets and business assets. If you’re sued or your business folds—your personal assets are fair game for creditors and in terms of legal liability.

Who is a sole proprietorship for?

A sole proprietorship is ideal for self-employed individuals like personal trainers offering individual coaching or artists selling unique items on platforms like Etsy.

Key considerations

• Cost-effective setup: The primary expense is usually the DBA (“doing business as”) registration. Some states may require public notice, like a newspaper ad. Generally, the total cost is below $100.
• Simplified taxation: Sole proprietorships are “pass-through” tax entities. Profits and losses are reported directly on the owner’s taxes, necessitating only a few additional tax forms if you’re the sole worker.
• Hiring employees is possible: Being a “sole” proprietor doesn’t restrict hiring. If you employ others, tax processes become slightly more intricate.
• Limited ways to raise funding: You can’t sell company stock, limiting fundraising avenues.
• Potential loan difficulties: Banks might hesitate to grant loans to sole proprietorships due to perceived credibility issues.
• Full personal liability: If the business faces debt or legal issues, your personal assets, including your home, car, and savings, are vulnerable.

Dig deeper:

Should you register as a sole proprietorship?

Explore the pros and cons of incorporating as a sole proprietorship.

How sole proprietorships are taxed

Understand how registering as a sole proprietor impacts your taxes.

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• Partnerships

Still a relatively simple business structure, a partnership involves two or more individuals sharing ownership of their new business. They’ll contribute to the business in some way and share in profits and losses.

Partnerships are harder to describe because they change so much. State laws govern them, but the Uniform Partnership Act has become the law in most states. That act, however, mainly sets the specific partnership agreement as the real legal core of the partnership so that the legal details can vary widely.

Usually, the income or loss from partnerships passes through to the partners without any partnership tax. The agreements can define different levels of risk, which is why you’ll read about some partnerships with general and limited partners, with different levels of risk for each. Your partnership agreement should clearly define what happens if a partner withdraws, buy and sell arrangements for partners and liquidation arrangements if necessary.

What are the types of partnerships?

• General partnership: Assumes equal involvement of all parties in profits, liabilities, and duties. Any intentional imbalance should be specified in the partnership agreement.
• Limited partnership: Suited for partners in an investor role with limited involvement in daily operations. This structure is more complex and less common.
• Joint venture: Designed for a single project or a limited duration, operating similarly to a general partnership.

Who is a partnership for?

A partnership is similar to an extended sole proprietorship and is ideal for two or more individuals wanting to start a business jointly. 

To make the partnership more effective, you and your partners should have skillsets, connections, or other unique benefits that complement each other. 

For example, a personal trainer and nutritionist building an online fitness program. One entrepreneur has experience building an exercise regiment with clients. The other understands how to create balanced meal and supplement recommendations. 

They have unique but complementary knowledge that, when combined, creates a more valuable product/service.

• Partnership agreement: While not mandatory, it’s advisable to draft a partnership agreement, ideally reviewed by legal counsel, to clarify roles and responsibilities, ownership, and what will happen if a partner wants to leave the partnership.
• Tax implications: Partnerships are “pass-through” entities, meaning profits and losses are directly passed to the partners. Refer to the IRS for partnership tax details.
• Additional costs: Since it’s a good idea to have a lawyer look over your partnership agreement, don’t forget to factor in this added expense.
• Trust in partnership: Ensure your partner is trustworthy, as partners share responsibility for business decisions and debts. A well-drafted partnership agreement can prevent future conflicts.

How to create a business partnership agreement

Even if you’re not in an official partnership, you should consider drafting a partnership agreement. Doing so will clearly define rights and responsibilities and help you amicably resolve any disputes.

How partnerships are taxed

Understand how registering as a partnership impacts your taxes.

Plan for changes with a buy-sell agreement

What will you do if you or your partner quits, sells their portion of the business, or passes away?

How to find the right business partner

A partnership is more than a legal structure. It’s a relationship between entrepreneurs who share a passion for an idea and bring unique skill sets. So, how do you find the right person to make your partnership thrive?…

Traits to look for in a business partner

What makes a good business partner? If you’re considering someone with the following traits, you likely have a good fit.

How many partners should you have?

What’s the ideal number of business partners? The right mix of people and skillsets can lead to tremendous business growth. But too many may lead to disaster.

What to do when your business partner is your life partner

Should your significant other be your business partner? Learn your legal options and how to find the right ownership fit for your business and relationship.

• Limited liability company

Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating?

It’s understandable—plenty of would-be entrepreneurs shudder at the thought of the bank seizing their personal assets should the business go south.

A limited liability corporation (or LLC) is, in some ways, the best of both worlds. It allows for the flexibility of a partnership or sole proprietorship but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation. It offers a combination of some limitations on legal liability and some favorable tax treatment for profits and transfer of assets.

Who is a limited liability corporation for?

An LLC is ideal for those wary of personal liability in business. If you possess significant personal assets or operate in a lawsuit-prone industry—an LLC safeguards your personal finances. 

• Complexity: While offering more protection, an LLC is harder to establish than a sole proprietorship or partnership.
• Tax benefits: LLCs maintain “pass-through” tax status, meaning you’re taxed only on your profit share, which is reported on personal taxes. 
• Single-member LLCs: Most states allow single-person LLCs, making it a potential alternative to sole proprietorships.

How to form a limited liability company

Interested in forming an LLC? Here are the steps you’ll need to take.

How to create an LLC operating agreement

Set the rules for how your LLC will operate, including the management structure, individual responsibilities, ownership percentage, and other important information.

LLC costs and fees explained

Make sure you’re aware of all the costs and fees associated with forming an LLC.

How LLCs are taxed

Understand how registering as an LLC impacts your taxes.

• Corporations

Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States.

Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made. You’ll almost always want to have your CPA, and in some cases, your attorney, guide you through the legal requirements for switching.

Who is a corporation for?

Corporations are best suited for larger, established businesses with multiple employees, plans for rapid scaling, or intentions to trade or attract significant external investments publicly. A corporation might not be the right choice if you’re a small business owner or work with a small team.

What are the types of corporations?

C corporation.

What we typically think of when we refer to corporations, where all shareholders combine funds and are then given stock in the newly formed business. 

A C corp is a separate tax entity, meaning your business can deduct taxes. It also means that earnings can be taxed twice, as they are concerning your business and your personal taxes if you take income as dividends. However, good tax planning can often minimize the impact of double taxation.

Most lawyers would agree (but verify this with your lawyer who is familiar with your unique business) that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

S corporation

An S corp is similar to a traditional C corporation, with one major difference: Profits and losses can be “passed through” to your personal tax return without being taxed separately first.

In practical terms, the owners can take their profits home without first paying the corporation’s separate tax on profits. In most states, an S corporation is owned by a limited number of private owners (25 is a common maximum), and only individuals (not corporations) can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state and then request S corp status. The IRS instructions for Form 2553 (which you’ll need to file to become an S corp) can help you determine if you qualify.

B corporation

Does your company have a dedicated social mission, a good cause built into its foundation that you’d like to continue furthering as your company grows? If so, you might consider becoming a B corporation, which stands for “benefit corporation.” 

However, the name is a bit misleading; a B corp isn’t an entirely different structure than a regular C corporation. It’s a C corp vetted and approved for B corp status. Some states give tax breaks to B corps, and it’s a great way to stand behind a cause.

So, why would you choose a B corp over a nonprofit? The biggest difference is in ownership—with a nonprofit, no owners or shareholders exist. A B corp, which is still a type of corporation, still has shareholders who own the company. So, a B corp has a social mission but is still a for-profit company (as opposed to a nonprofit) with an end goal of returning profits to the shareholders.

• Liability: Corporations offer the most protection for personal assets.
• Capital raising: The ability to sell stock enhances investment potential.
• Taxation: Corporate taxes are separate (except for S corps), but the structure can lead to double taxation, especially for C corporations.
• Complexity: Establishing a corporation is more intricate than other business structures, requiring more paperwork and formalities.

How to form a corporation

Follow these ten steps to incorporate as a C, S, or B corporation.

How are corporations taxed?

Understand how registering as a corporation impacts your taxes.

S corporation basics

Should you choose an S corp as the legal structure for your business? Learn the basics and what alternatives are available.

B corporation basics

Should you choose a B corp as the legal structure for your business? Check out this detailed overview of how this business entity functions and the pros and cons you’ll contend with.

A nonprofit is a “not-for-profit” business structure, meaning the business does not exist to generate revenue for shareholders, but rather funnel business revenue into a social mission, cause, or purpose.

Who is a nonprofit for?

Nonprofits cater to those with missions centered on charitable, educational, scientific, or religious purposes. Examples include homeless shelters, conservation groups, arts centers, and educational institutions.

What’s the difference between a nonprofit and a cooperative?

Like a nonprofit, a cooperative is a business with a social mission that doesn’t divide income between shareholders but toward a cause or purpose. However, while some states view nonprofits and cooperatives as the same, a cooperative differs because the members own it, referred to as “user-owners.”

If you plan on organizing your business to be democratically owned, looking into the cooperative business structure might be a good idea to look into the cooperative business structure .

• Complex setup: Establishing a nonprofit requires steps similar to forming a corporation, including filing articles of incorporation, creating bylaws, and organizing board meetings.
• Fundraising will be your main priority: Nonprofits generally rely on fundraising and grants to keep a flow of income into their business.

What is a nonprofit corporation and how to start one

Learn the basics of setting up a nonprofit corporation.

How to earn income as a nonprofit corporation

Learn how related and unrelated business activities can generate revenue for a nonprofit corporation.

• Making your business legally compliant

Choosing a business structure is the first legal step you’ll take. Your choice will impact your taxes, fundraising, and personal liability. 

Tim Berry, founder of Palo Alto Software (maker of Bplans) reminds small business and startup founders that choosing a business entity or structure is something to take seriously. He says:

“Make sure you know which legal steps you must take to be in business. I’m not an attorney, and I don’t give legal advice. I strongly recommend working with an attorney to review the details of your company’s legal establishment and licensing. The trade-offs involved in incorporation versus partnership versus other structures are significant. Small problems developed at the early stages of a new business can become horrendous problems later on. In this regard, the cost of simple legal advice is almost always worth it. Don’t skimp on legal costs.”

TLDR: Take time, carefully weigh your options, and consult a legal professional.

Once you’ve chosen, check off the remaining legal requirements to start a business. While you can complete most of these in any order, here are a few suggestions.

• Apply for a federal and state tax ID
• Obtain licenses and permits
• Register your business name

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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Start » startup, getting ready to launch how to choose the right business structure.

Choosing the right business structure can be tricky. We walk you through the pros and cons of each.

When you first start a business, your mind may be swimming with an endless number of tough decisions to make. One of those – choosing the proper legal “corporate form” – can be a complicated endeavor. You do not have to overthink it, though, and your initial decision is not necessarily set in stone. Plenty of huge companies started as sole proprietorships before shifting to a more complicated corporate form, and so too, many small startups have unnecessarily burned precious startup capital on lawyers for too-complicated legal structures.

Here then are some of the basic pros and cons to think about when structuring your small business.

Sole proprietorship

Contrary to popular belief, you do not necessarily need to set up any type of formal structure before launching a business. In fact, most of us have run a sole proprietorship without even knowing it. If you ever got paid directly for babysitting or mowing a lawn, you were running a sole proprietorship. A sole proprietorship is simply a business owner who runs a business without any formal corporate structure. They simply report their profits and losses on their personal tax return (or at least they should).

Ideally, you will create a separate checking account for your proprietorship and keep good records of any profits and losses. That will be important come tax time. You should also register the name of your business with the state and you may also need local business licenses. That said, all in all, setting up a sole proprietorship requires only a very minimal amount of time, effort and expense.

The best thing about a sole proprietorship is that it is easy to create and maintain. Setting up many types of corporate forms can cost anywhere from $50 to thousands of dollars, but that is not the case with a sole proprietorship.

The biggest drawback of sole proprietorships is the potential for personal liability. For example, if you chose to incorporate your business instead, your corporation is a separate legal entity apart from you. The corporation, not you personally, is liable for the business’ debts and liabilities.

This is not true for a sole proprietorship.

If you are working as a sole proprietor and your company gets into trouble, you and your business are one and the same. For example, a woman in Pennsylvania that ran a grocery store as a sole proprietor for many years was recently forced into bankruptcy. She now personally owes her grocery store's bakers and vendors, and a judge may sell her home to try to pay the debts of her store.

The other drawback is obvious. A sole proprietorship can only have the one sole owner. If you want your business to survive you, or you want to go into business with someone else, you will need to choose another entity.

[Read our full guide on sole proprietorships ]

General partnership

The easiest way for two or more people to go into business together is to form a general partnership . Like a sole proprietor, general partners usually do not need to file any formal paperwork, although having a written partnership agreement that spells out duties, responsibilities and financials is strongly advised. Partners generally share profits and losses equally, jointly run the business, invest money together, and own property together.

General partnerships are easy to form, and the profits (or losses) of the partnership are reported on the partners’ personal tax returns. One of the biggest risks of a partnership, however, is that each partner can make decisions for the whole, typically unilaterally, and yet all partners are responsible for that decision.

Similarly, as with a sole proprietorship, each partner is personally liable for the debts of the business. There is no corporate shield. Additionally, a partnership can be said to be formed by the actions of the participants even if they did not intend to start a partnership. One final big limitation with partnerships is that they are usually destroyed when one partner leaves.

[Read our full guide on general partnerships .]

Contrary to popular belief, you do not necessarily need to set up any type of formal structure before launching a business.

C corporation

A corporation is a legal entity that has two main features: (1) limited liability, and (2) infinite life. Both of these should be attractive to an entrepreneur. As indicated, limited liability is very important because it allows people to enter into a business without putting their personal assets at risk. For example, if you bought stock in Coca Cola, you would not want to personally be sued if the company sold a tainted batch of soda. Instead, if Coca Cola goes bankrupt, its shareholders would only lose the money they put into the company.

“Infinite life” means just that. A corporation can live on as long as its shareholders keep it alive. A sole proprietorship will obviously die when that sole proprietor dies or quits the business. A corporation is owned by its shareholders, though, and will carry on even as some shareholders quit, sell their shares, or die.

Corporations have a tremendous amount of flexibility in how they are formed, but probably the most important distinction for a small business is choosing a tax treatment. A " C corporation " is one that chooses to pay the corporate income tax directly to the government (as opposed to flowing through to the owner’s personal return.) Most large companies like Xerox and Amazon are C corporations, which refers to Subchapter C of Chapter 1 of the Internal Revenue Code.

Limited liability and endless flexibility. As mentioned previously, the main reason to create a corporation is to limit the liability of the business owners. A corporation can be set up in an infinite number of ways with all kinds of formal management processes in place. Additionally, major investors who often work with corporations will not get involved if the business is structured any other way.

Double taxation and complicated setup. C corps are subject to double taxation, that means that the company is taxed once on earnings, and then shareholders are taxed again on distributions. This process has been made less painful by recent changes to the U.S. tax code, but corporations in the United States are still taxed at 21%.

[Read our full article on C Corp.'s]

S corporation

S corps are often the preferred legal structure for many a small business because of

• Limited liability
• Tax savings

S corps are "pass-through" entities, meaning, while the owners still get the benefits of limited personal liability, profits from the corporation flow through directly to the owner’s personal taxes. S corps therefore are not taxed separately. The IRS has strict requirements for S corps, but there is no actual limit on the size of an S corp.

Limited liability and tax relief. S corps come with all the limited liability benefits of any other corporation, while still allowing the business to be structured a number of ways. The IRS restricts some things for S corps that a C corp can do, though; for example, a C corp can have more than one class of stock, while an S corp cannot.

The most important thing about an S corp is that it avoids double taxation . S corps can make distributions to its owners that are not subject to income tax or self-employment taxes. In order to keep S corps from using that rule to completely avoid paying employment taxes, the IRS does require S corps to pay market-rate salaries to its owners.

A more complicated setup. S corps can sometimes be relatively complicated to set up, and simple mistakes can cost an S corp its status. A professional should usually be involved.

Limited liability company

Limited liability companies, or LLCs, are a relatively new corporate form that was invented in Wyoming in 1977 at the behest of an oil company seeking to launch a new venture that would be run like a partnership, have limited liability, and also avoid double taxation at the federal level. Wyoming did not have a state income tax at the time, so, since the state legislature did not have to worry about losing tax revenues, it agreed to try it.

Florida created a similar scheme in 1982 and the U.S. Congress started to pay attention. In a 1986 tax reform bill, Congress blessed the LLC concept, and today LLCs can be formed in every state that will be honored in every other state. In fact, LLCs have become “undeniability the most popular form of new business entity in the United States” despite being somewhat new.

The best of both worlds. LLCs were created to allow owners to enjoy all of the best parts of the other corporate forms, so they have a lot of pros.

• LLCs are easy to form, and, if used properly, provide limited liability like any other corporation. Forming an LLC is typically as easy as filling out a form and paying around $10.
• An LLC is easily managed by its members, who vote in proportion with their membership. So, if a two-member LLC is owned 60% by one member, that member basically makes all the decisions. LLCs can also have one member, making it a “single-member LLC” that runs just like a sole proprietorship but with limited liability protections.
• LLCs can also grow to have hundreds of members that oversee the business while hiring extensive teams of managers to run the business.

When set up correctly, an LLC can be taxed however you want . LLCs are often treated as “disregarded entities” where the LLC’s activities are accounted for on its owners’ tax returns, just like a sole proprietorship or partnership. LLCs can also be set up as an S corp tax-wise, or they can elect to pay corporate income taxes to avoid passing through profits and losses to their members.

The cons of an LLC are few and far between. There is some cost to creating them, typically ranging from $50 to $500. LLCs are limited in their ownership structure, as they cannot sell non-voting shares the way a corporation can. LLCs cannot deviate from being member-controlled, either. For these reasons, investors are somewhat leery of the LLC, making them unsuitable for most large businesses and for small companies hoping to grow rapidly.

[Read our full guide to LLC' s]

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Sole Proprietorship

Partnership, limited liability company (llc), corporation, templates and examples to download in word and pdf formats, how to choose the best legal structure for your business.

Deciding on a specific type of legal structure when you've just started your business journey can be complicated. It's hard to know exactly what the differences are, how the different structures can benefit you, and what any risks might be.

Luckily, it doesn't have to be so complicated! In fact, we've published this guide on everything you need to know about choosing the right legal structure for your business to help you along the way.

The most common business structures are sole proprietorships, partnerships, limited liability companies, and corporations. Here, you'll learn about each one in detail to help you choose the right fit for your business, as well as a non-profit, which you might consider for a new charitable business.

What type of structure you choose will make a big difference over the life of your business. It can have significant tax implications, as well as implications for your personal level of risk. It is not a decision that should be made lightly.

Below, we examine each common business structure in detail.

A sole proprietorship is the simplest type of business structure and the easiest to form and maintain. A sole proprietorship is basically a business that is you - and you are the business! For example, if you were a freelance writer on the internet and wanted to operate as a sole proprietorship, you wouldn't have to do anything at all to already be up and running, as long as you wanted to operate under your name.

In a sole proprietorship, no separate legal entity is created. If you'd like to operate under a special name, like a new business name or just a different name other than your own legal name, you would file what is called a "Doing Business As" (or DBA, as it is referred to) document with your state. All this document does is tell the state that you, as a legal person, are doing business under the name you've chosen for your business.

Because of the simplicity of the sole proprietorship, the way that your taxes are handled is also fairly simple. The taxes of the sole proprietorship would "pass through" to you, meaning you report any profit or loss on your own taxes and don't have to go through a separate process for the business.

One of the biggest drawbacks to a sole proprietorship is that you can be personally on the hook for any business liabilities - whether you make a big financial loss one year or whether your business gets sued. That's because in a sole proprietorship, there is no separation between you as a person and you as a business, so anything you own, in terms of assets, may be up-for-grabs by any creditors or the public to whom you are facing liability.

Another big drawback is that you may have a hard time raising any money. In a sole proprietorship, you can't issue stock in the company, so it could be hard to attract capital investors. You also may not have much success getting a bank loan, because banks generally don't favor lending to sole proprietorships.

How to form a sole proprietorship

To create a sole proprietorship, as mentioned above, you wouldn't have to file anything with your state other than a DBA, if you'd like. There can be fees associated with the DBA form, which vary per state. But keep in mind you might have separate documents to file, depending on your business. These could include special licenses or permits.

Why you might choose a sole proprietorship

A sole proprietorship is a good idea if you are a solopreneur with a small business and you are planning to keep it that way. It's very easy to form (you either have to file no documents or just one DBA) and you can get focused on starting your business right away. It's also very cheap to get started.

Especially if your business may not be facing a high level of risk, a sole proprietorship might be for you. A sole proprietorship wouldn't be recommended if, let's say, you ran a business that dealt with large amounts of other people's money on a regular business, or as a health professional, or really any area where the risk of being liable for something serious is high.

Final overview

Sole proprietorship benefits:.

1. It's cheap and easy to form.

2. Taxes are easy to keep track of.

3. You still have the option to have employees if you would like.

Sole proprietorship drawbacks:

1. There is a high level of personal risk for liabilities.

2. You may have difficulty raising funds.

If a sole proprietorship is the simplest business structure for an individual looking to operate their own small business, a partnership might be considered that for two or more people.

In a partnership, the two or more "partners," as they are called, each generally have a say in how the company runs (depending on the structure of the partnership) and each own a piece of the company, including its profits and losses.

In a partnership, you can also have different types of partners - general partners and limited partners - or you can have just a general partnership with all the same types of partners. General partners are equally responsible for everything: all the profits, any potential losses, any liabilities that might come up, and general responsibility for the company, including the amount of work done. Limited partners are those that are basically only partners for a financial reason, in that they invest but have not much else to do with how the company runs. Overall, partnerships with limited partners are a little rarer, as people like to go into partnerships with equal weight.

Imagine a situation where two people decide to open a yoga studio together. Their structure of choice may be a partnership.

A joint venture, formed with a Joint Venture Agreement , is a type of general partnership that only lasts for one specific project or a limited amount of time.

Joint venture is a generic term for any business relationship between two parties for a limited time. A joint venture could be for a brand new business, or just one marketing promotion, or even just a project between two already-formed businesses. In a joint venture, the parties could decide to form a temporary partnership, with a Partnership Agreement , but they don't have to: they can also retain their fully separate legal identities and just operate with a Joint Venture Agreement.

Taxes in a partnership can pass through, just like in a sole proprietorship.

The formation of a partnership, however, can be very complicated. Many states have adopted something called the Uniform Partnership Act, which makes the written Partnership Agreement very important. Partners will need to figure out everything from how they'll run the day-to-day business to what happens if the business folds or if someone wants to leave.

The Uniform Partnership Act is similar to a model statute or model law, in that it was drafted to be applicable uniformly, but states each had to individually adopt it. The Uniform Partnership Act, or UPA, gives guidance on how business partnerships should be formed, governed, and dissolved.

How to form a partnership

As mentioned above, the basis of partnership formation is the written Partnership Agreement, which sets out all of the details of the business relationship between the parties. Unless you also want to file a DBA, you won't need to file any partnership documents with your state.

Keep in mind, however, that as above, you may need specific licenses or permits for your particular business model.

Why you might choose a partnership

A partnership is a good idea if you are running a small business with another individual or a few individuals. As with a sole proprietorship, it's very easy to form (you either have to file no documents with the state or just one DBA) and you can get focused on starting your business right away. It's also very cheap to get started, just like a sole proprietorship.

If you're not sure of the trustworthiness of your potential partners, however, a partnership may not be the way to go for you, as you could be exposing yourself to a high level of risk just because of the actions of your partners. Either way, however, you should always have a well-written Partnership Agreement in place.

Partnership benefits:

1. It's relatively cheap to form.

2. Generally, unless you have a DBA, you won't need to file with the state.

3. Taxes pass through.

Partnership drawbacks:

1. The Partnership Agreement can be a complicated document.

2. It can be very risky if your partners are not trustworthy.

A Limited Liability Company, or LLC for short, has largely become the preferred form of structure for many small- to medium-sized businesses, and even for a lot of solo business owners. The reason for this is because it has a lot of benefits of other types of business structures, without as much of the risk.

In an LLC, there is a lot of customization available for how the business is run. LLCs can be used for small businesses or large ones. You can form an LLC just for yourself or have an LLC with many different members. The main benefit of an LLC is that your personal assets are shielded from liability - hence the name, "limited liability" company.

Taxes still pass through in LLCs. If you are a single-member LLC, the taxation is similar to a sole proprietorship. In a multi-member LLC, you are taxed on just your portion of the profits.

LLCs can, therefore, be formed for almost any purpose - for a single freelance artist or a group of people looking to open a bakery together, for example. LLCs can even be formed for professionals, like a legal or medical practice.

Since all business structures are formed according to the state, and not federal, government, the requirements to file and run the business, especially for the more complicated structures, can vary.

Forming an LLC is more complicated than either a sole proprietorship or partnership, as it involves filing specific documents in a specific form with the state.

How to form an LLC

An LLC is generally filed with your state by drafting Articles of Organization , the creation document for the company. Before this, you'll also have to ensure that you have a business name that will work by running a search on your proposed business name with your state's Secretary of State (usually this can be done easily on the Secretary of State website). An Operating Agreement is also a very good idea to have drafted (though it is not required), especially if you have more than one LLC member.

If you would like to operate under a special name for your LLC, you may also have to file a DBA.

Why you might choose an LLC

An LLC is a good idea when you want to have the maximum amount of liability protection for your business, either as a solo business owner or as part of a team and you don't want to build a corporation (more on that below). It's also a good idea if you still want the simplicity of taxation and the ability to organize your business as you like.

Whenever you file your LLC, make sure you keep all of the records separate to ensure your liability protection. Your organizational records, banking records, and, if applicable, personnel records all need to be records of the LLC specifically, not mixed in with your own personal records.

LLC benefits:

1. You are protected from personal liability.

2. Taxes pass through.

LLC drawbacks:

1. It's a little more expensive and complicated to form than a sole proprietorship or partnership.

2. Your liability is subject to the separateness of all of your records.

A corporation is generally the most complex legal structure , involving a lot of time and resources at its formation and then on through its life. A corporation is its own separate entity - often sometimes compared to a business version of a legal "person." In other words, the corporation is its own body separate and apart from you or any of the other owners, called "shareholders."

A corporation can take one of three main forms: the C corporation, the S corporation, or the lesser-known B corporation.

Most big companies in the United States, like Fortune 500 companies, are organized into a C corporation. It's the "traditional" corporate structure that people think of when they think of corporations. In a C corp, there are owners, called shareholders as noted above, who all put money into the business and receive shares, or stock, in return. The corporation gets taxed on its own - but so do any shareholder earnings, which means that with corporations, there is what's called "double taxation." All that means is that money into the corporation gets taxed as does money to the shareholders. In a C corp, there is almost no personal liability of the shareholders. Additionally, there is the possibility of the shareholders earning a lot of income if the corporation ever goes public.

The S corporation is a slightly different entity, similar to the C corp, but with the possibility of pass-through taxation. As discussed in the other business forms, what this means is that profits and losses can go straight to the owner or owners of the S corp, making it a good idea for small businesses. The S corp is a little more limited than the C corp in most states, however, as it can usually only be held by a certain limit of private individuals (for example, up to 25 owners that all have to be real people, rather than legal entities).

A B corporation is a lesser-known structure than the others and that's because it won't be applicable to most people. B Corps are designed for those that want to form essentially a C corporation but for some social good. The B stands for "benefit." A B Corp is very similar to a C Corp, except that sometimes the corporation receives certain tax breaks.

How to form a Corporation

Corporations are formed by filing a significant document covering the details of the corporation with the Secretary of State, called the Articles of Incorporation . Most corporations need to have a viable business name and go on to obtain a tax identification number from the Internal Revenue Service.

It's a good idea to also draft a document called the Corporate Bylaws , which set down the governing rules for the corporation.

Why you might choose a Corporation

You might decide to file a corporation if you are looking for a lot of growth potential for your business or if you knew you wanted to start bringing on shareholders right away. A corporation is a good idea if you plan to hire a lot of employees, as well.

It's probably not a good idea for very small business or individuals who don't plan to grow at a very high rate, as the expense of setting up and maintaining the structure, as well as the double taxation, would easily make it more cumbersome than its worth.

Corporation benefits:

2. Raising capital may be easier here than any other business form.

Corporation drawbacks:

1. It's more expensive and complicated to form than any other business form.

2. It's also complicated and expensive to maintain.

3. Double taxation may end up costing you more.

A non-profit is different than all of the other business structures - and the difference is in its name. Non-profits are created for a different reason than just generating profit; usually, the reason is some kind of social cause.

Non-profits are tax-exempt entities, and because of this, they need to have a specific purpose that is either charitable, religious, or educational.

How to form a Non-profit

Forming a non-profit requires Articles of Incorporation with the Secretary of State. You'll then need to file specifically to obtain tax-exempt status from both your state and the federal government.

If you plan to have multiple people in your non-profit, drafting Non-Profit Bylaws is a good idea.

Why you might choose a Non-profit

The option for a non-profit is really only there if you have a business that is for charitable, religious, or educational purposes. Once you decide that you do, then you must ensure you really aren't running a business for profit and that the primary purpose is for another reason. If those requirements are met, the non-profit is the best choice for you.

If you'd like to run a business for a social cause, but still want to have the main goal of earning a profit, a B corporation might be better suited to your needs. With a non-profit, one of the main activities will simply have to be fundraising to keep the business afloat. In a B corporation, however, you can do good and still turn a profit.

Non-profit benefits:

1. Tax-exempt status can be obtained.

2. It's the best structure for any primarily charitable business.

Non-profit drawbacks:

1. You must meet the requirements to open a non-profit.

2. Your business can't be run primarily to earn a profit.

When deciding what type of structure might be best for you, ask yourself the following questions:

1. How much time and effort am I willing to put in to set up the business at the beginning?

2. How much time and effort am I willing to put in to maintain the business over time?

3. Is pass-through taxation important to me?

4. What will be personal liabilities be?

5. Am I interested in easily raising capital?

Once you've asked yourself these questions, with the knowledge obtained from this guide, you'll be in a great place to decide what the best structure is for your needs.

About the Author: Anjali Nowakowski is a Legal Templates Programmer at Wonder.Legal and is based in the U.S.A.

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  January 23, 2024

Business structure types: how to choose the best legal structure for your business .

When starting a business, one critical decision every entrepreneur must make is choosing the most suitable entity structure. The entity structure you choose will not only lay the foundation for legal and operational aspects, but it will also play a significant role in determining your business’s tax implications and liabilities.

What Is a Business Legal Structure? 

Before registering your business with the state you’ll be operating in, you’ll need to choose a business structure. A business structure is the formal organization and classification of a business entity, determining how it is legally recognized and operates. This structure defines the relationships between the business and its owners, as well as the level of liability protection, tax implications, and operational flexibility. Common structures include:

• Sole Proprietorships
• Partnerships
• Corporations
• S Corporations
• Limited Liability Company (LLC)

When choosing a business structure, it is important to consult with both attorneys and accountants as correcting unfavorable entity structures carries limitations, restrictions, compliance, and tax consequences.

Why Is a Business Legal Structure Important

The business legal structure is a foundational aspect that affects liability, taxation, governance, and overall operations. A well-chosen business legal structure is crucial for several reasons, including providing clarity on ownership, managing liability, and influencing the business's tax treatment.

As you set up your new business, you should be looking beyond the immediate future and considering what is essential for the long-term success and sustainability of the business.

Types of Business Structures

Each type of business structure has distinct characteristics that suit different business needs and goals. Understanding these structures helps entrepreneurs make informed decisions about the legal framework that best aligns with their business objectives and circumstances.

Below, we’ve outlined various types of entity structures, as well as some key considerations for making your decision. This list is non-exhaustive and meant solely as a primer. We always recommend consulting with your tax partner as well as a lawyer before forming a new business entity, as there are both legal and tax effects of this decision an expert will be able to guide you through.

Sole Proprietorship

Although the simplicity and ease of setup (and closure) make a sole proprietorship an attractive option for one-person businesses, the personal liability can be a drawback. With a sole proprietorship, the owner is personally responsible for all debts and obligations as a separate business entity is not created. Although you will be able to take a trade name, you will not be able to sell stock. Sole proprietorship is a safe, low-risk choice for business owners who want to try something out—not for businesses looking to quickly expand and fold in more leadership.

General Partnership

A general partnership is ideal for businesses with two or more owners who want to share decision-making and profits. Much like a sole proprietorship, a general partnership means each partner will be responsible for all of the business’s debts and obligations, and they share liability and risk.

General partnerships are easy to both set up and dissolve, and taxes are simpler to file as you will not have to pay corporate taxes due to the pass-through structure.

Limited Partnership 

A Limited Partnership is a business structure consisting of at least one general partner and one or more limited partners. The general partner assumes unlimited personal liability for the business's debts and obligations, while limited partners enjoy liability protection. This limits their losses to the amount they have personally invested in the partnership. Limited Partnerships are often favored for ventures where investors want to contribute capital without actively participating in the management and decision-making processes.

Limited Liability Partnership 

A Limited Liability Partnership is a flexible business structure combining elements of partnerships and corporations. In an LLP, all partners have limited liability, protecting their personal assets from the business's debts and liabilities.

Unlike general partnerships, LLPs allow every partner to actively participate in the management and decision-making processes, making it a popular choice for professional services firms such as law or accounting firms. However, individual partners remain personally responsible for their professional conduct and the consequences of their own errors or omissions.

Limited Liability Company

Unlike a sole proprietorship or a partnership, an LLC provides the benefits of limited liability protection while maintaining flexibility in management and tax treatment. By choosing an LLC, if or when your business faces bankruptcy or lawsuits, your personal assets won’t be at risk. LLCs offer pass-through taxation where profits and losses flow through to individual tax returns.

However, ownership within LLCs can be complicated, with some states requiring a dissolution if a member leaves. In order to prepare for such circumstances, business owners should work with an attorney to create an agreement that includes how ownership transfer, buying, and selling are handled within the entity.

Corporation

The law regards a corporation as separate from its owners, with legal rights independent of its owners. A corporation can sue and be sued, own and sell property, and sell the rights of its ownership in the form of stocks. Although corporations have extensive rights, they also require more extensive record-keeping, operational processes, and reporting to maintain those rights. The two most common corporation types are:

• C Corporation: A C corporation provides limited liability protection to shareholders and facilitates easier access to capital through stock issuance. However, it is subject to double taxation at the corporate level on profits and at the individual level on dividends.
• S Corporation: An S corporation combines limited liability protection with the pass-through taxation benefits of partnerships and LLCs. Creating an s corporation is subject to specific eligibility criteria, including restrictions on the number and type of shareholders, and requires filing with the IRS in order to gain S corp status.

Nonprofit Corporation

Although nonprofits are also a type of corporation, there are some distinct differences that separate them from the other types. Nonprofits are legal entities organized and operated for a collective, public, or social benefit.

Because there is less of a focus on profit, nonprofit corporations receive tax exemption, but applying for nonprofit status requires filing with the IRS as a 501(c)(3) corporation. How nonprofit corporations use their funds is also regulated, with things like political campaign spending being banned from acceptable expenses.

What Business Structure Should I Choose?

Looking at the different types of entity structures, it’s easy to see how a new business might fall into two or more of the categories, making it hard to know which entity is the right choice. Careful consideration of the following factors is essential to ensure the chosen structure aligns with the business's objectives and maximizes opportunities for growth and tax efficiency.

10 Factors to Consider When Choosing a Business Structure

When examining liability, you should assess the potential risks and liabilities associated with the business and choose a structure that shields personal assets from business obligations. While a corporation carries the least amount of personal liability since the law holds it is its own entity, entities like sole proprietorships hold the most. Partnerships share the liability between the partners as defined by their partnership agreement.

Evaluate the tax advantages and disadvantages of each structure, considering both current and future tax obligations. An owner of an LLC pays taxes just as a sole proprietor does, with all profit considered as personal income and taxed accordingly at the end of the year, while a corporation files its own tax returns each year, paying taxes on profits after expenses. With your accountant’s guidance, consider factors such as pass-through taxation, self-employment taxes, and potential tax planning opportunities.

Determine the desired ownership and management structure based on the number of owners, their roles, and the decision-making process. If you’re seeking primary control, you should pursue a sole proprietorship or LLC, while corporations are constructed with a board of directors who guides the company’s decision making. Control in a partnership is negotiated.

Flexibility

Assess the different structures and how they offer varying degrees of flexibility in terms of management, decision-making, and distribution of profits. Sole proprietorships and partnerships provide more flexibility, while corporations may have more rigid structures with defined roles and responsibilities.

Each structure comes with its own set of legal and regulatory requirements. Sole proprietorships and partnerships generally have fewer compliance obligations, but they may lack the liability protection of more formal structures. Corporations, on the other hand, often face more stringent compliance requirements due to their legal status. Understanding and adhering to these regulations are crucial for avoiding legal issues and ensuring the business operates within the boundaries of the law.

Assess the potential need for external funding and the preferences of potential investors. If you need to obtain outside funding from an investor, corporations may be more attractive to venture capitalists and investors, who will provide capital in exchange for convertible debt or ownership equity.

Business Continuity

Consider the business's growth trajectory and long-term goals, as well as the potential for mergers, acquisitions, or an eventual sale. Certain entity structures may offer more flexibility and tax advantages for future exit strategies.

Administrative Requirements

In addition to legally registering your business entity, you also may need specific licenses and permits to operate. Depending on the type of business you’re forming and its activities, it may need to be licensed at the local, state, and federal levels.

Ownership Transferability

Ownership transferability is a key consideration for those looking to establish a business that may undergo changes in ownership over time. Sole proprietorships and partnerships may face challenges in transferring ownership, as it often involves reorganizing the entire business. Corporations, particularly those with publicly traded shares, offer greater ease in transferring ownership through buying and selling shares in the stock market. Considering the long-term goals and potential changes in ownership can guide the selection of a business structure that aligns with the desired level of transferability.

Costs are a practical and financial aspect that entrepreneurs must carefully evaluate when choosing a business structure. The costs associated with formation, maintenance, and compliance vary significantly between structures. Sole proprietorships and partnerships are generally more cost-effective to establish and maintain, with fewer administrative requirements. Corporations may involve higher initial costs and ongoing fees, but they often provide greater access to capital and potential tax advantages. Balancing the upfront and ongoing expenses against the benefits each structure offers is crucial for making a financially sound decision.

Contact Mowery & Schoenfeld for Help Choosing the Right Legal Structure for Your Business 

Deciding on the most appropriate entity structure is a complex task that requires careful analysis and understanding of legal, operational, and tax implications. This is a complicated process which requires professional insight. Before selecting an entity, schedule a meeting with Mowery & Schoenfeld today to help you navigate choosing a legal structure that’s tax effective for your situation.

Business Structure

The legal structure of an organization that is recognized in a given jurisdiction

What is Business Structure?

Business structure refers to the legal structure of an organization that is recognized in a given jurisdiction. An organization’s legal structure is a key determinant of the activities that it can undertake, such as raising capital , responsibility for obligations of the business, as well as the amount of taxes that the organization owes to tax agencies.

Before making a choice on the type of legal structure, business owners should first consider their needs and goals and understand the features of each business structure. The four main forms of business structures in the United States include sole proprietorship, partnership, limited liability company, and corporation.

• A business structure describes the legal structure of a company that influences the day-to-day operations of a business.
• A sole proprietorship and partnership are simple to set up since they are not required to meet ongoing requirements such as shareholder meetings and voting.
• A corporation and a limited liability company provide limited liability protection to their owners, which serves to prevent the owner’s personal assets from being sold off to settle the entity’s debts and liabilities.

Forms of Business Structure

The different business structures are discussed in detail below:

1. Sole Proprietorship

A sole proprietorship is the simplest business structure and involves one individual who is responsible for the day-to-day operations of the business. Also, from a tax perspective, the incomes and expenses of the business are included in the tax return of the owner.

The business is not required to file separate income tax forms from the owner since the business does not exist as a separate legal entity from its owner. The owner is required to file Form 1040, and the form must include Schedule C and Schedule SE for self-employment tax.

There are several advantages to opting for a sole proprietorship business structure. First, it is inexpensive to start, and there are minimal fees incurred when registering a sole proprietorship. In most states, the only costs associated with running a sole proprietorship are business taxes and operating license fees.

Business owners may also be eligible for tax deductions, such as health insurance. Unlike a limited liability company, a sole proprietorship is not required to meet ongoing requirements such as shareholder meetings and voting or election of directors. On the downside, since it is not a separate legal entity from its owners, the owners will be personally liable for the debts, liabilities, and obligations of the business.

2. Partnership

A partnership is a form of business structure that comprises two or more owners. It is the simplest form of business structure for a business with two or more owners. A partnership shares a lot of similarities with a sole proprietorship. For example, the business does not exist as a separate legal entity from its owners, and therefore, the owners and the entity are treated as one person.

When filing taxes, the profits and losses of the business are passed on to the partners, and each partner is required to report the information in Form 1065 with their personal tax returns. Also, partners are required to pay self-employment tax, depending on their share of the enterprise’s profits. Schedule K-1, which records the profits or losses, should accompany Form 1065.

A partnership business structure offers several advantages. When registering a partnership, there is little paperwork involved, and the partners are not required to meet the same level of requirements that limited liability companies are subjected to. Also, partnerships enjoy a special taxation arrangement, where partners are required to report their share of profit or loss of the business on their income tax return.

On the downside, the partners are personally liable for the debts and obligations of the business, and their personal assets can be sold off to pay the business debts. Also, disagreements may occur between the partners and this  may slow down the operations of the business.

3. Corporation

A corporation is a type of business structure that gives the entity a separate legal entity from its owners. It is complex and expensive to set up, and it requires the owners to comply with more tax requirements and regulations. Most corporations hire attorneys to oversee the registration process and to ensure that the entity complies with the state laws where it is registered.

When an organization intends to go public through the issue of common stock to the public, it must first be incorporated as a corporation. Corporations are required to pay both federal and state taxes, while the shareholders are required to disclose their dividend payments when filing their personal income taxes.

The main types of corporations are C-corporation and S-corporation . A C-corporation exists as a separate legal entity from its owners, whereas an S-corporation may consist of up to 100 shareholders and functions in the same way as a partnership.

One of the advantages of a corporate structure is the ability to raise capital. The entity can raise large amounts of capital by selling shares of stock to the public. Also, the business structure comes with limited personal liability, offering the owners protection against debts, liabilities, and obligations of the business.

On the downside, a corporation is subject to more requirements, such as meeting, voting, and the election of directors, and it is more expensive to form compared to a sole proprietorship or partnership.

4. Limited Liability Company (LLC)

A limited liability company (LLC) is a hybrid business structure that combines the best of both worlds, i.e., it possesses the characteristics of both partnerships and corporations. It provides personal liability protection to business owners while reducing tax and business requirements. The profits and losses of the business are passed through to the owners, and each business owner is required to include a share of the profits/losses in their personal tax returns.

Also, unlike an S-corporation, which is subject to a limit of 100 shareholders, there is no limit to the number of shareholders in a limited liability company. When registering a limited liability company, the entity must file its articles of association with the Secretary of State where it intends to do business. In some states, the entity may be required to file an operating agreement.

One of the advantages of setting up a limited liability company is that it comes with fewer requirements compared to a corporation. Less paperwork is involved, and the owners enjoy limited liability, which protects their assets from being sold to pay liabilities of the entity. A limited liability company is not subject to any limitation on the number of shareholders it can appoint.

On the downside, a limited liability company is expensive to set up since it must register with the state where it intends to conduct operations. Also, the entity may need to hire an accountant and an attorney to ensure that it complies with tax and regulatory requirements.

Related Readings

Thank you for reading CFI’s guide to Business Structures. To keep learning and advancing your career, the following CFI resources will be helpful:

• Forms of Business Structure Course
• Business Strategy vs Business Model
• Corporate Strategy
• Flow-Through Entity
• Types of Organizations
• See all management & strategy resources
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• Choosing a Legal Structure

Created by  FindLaw's team of legal writers and editors | Last reviewed June 06, 2024

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This article has been written and reviewed for legal accuracy, clarity, and style by  FindLaw’s team of legal writers and attorneys  and in accordance with  our editorial standards .

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One of the most important choices you will make when forming your new business is which legal structure to choose from. Also called a business ownership structure or business form, choices include LLCs, partnerships, sole proprietorships, corporations, non-profits, and co-operatives.

The type of business entity you choose will depend on several factors such as liability, taxation and record keeping. The key is to find the best fit for your organization. The following resources will help new small business owners decide which legal structure is best for their business by examining the pros and cons of each, relevant investor issues, and more.

Form your LLC with confidence.  Our trusted partner LegalZoom has packages starting at $0 + filing fees.

Liability for Business Debts

No business owner wants to be personally liable for business debts or pay out-of-pocket for a judgment against the organization. How you structure your business at the outset will significantly impact your personal liability. There are a number of  business entities  available to help shield you, such as:

• Corporation
• Limited-liability company (LLC)
• Limited-liability partnership (LLP)
• Limited partnerships (LP)
• General partnership
• Benefit corporation

Consider avoiding the sole proprietorship model if you want maximum asset and  liability protection .  Sole proprietors  benefit from the easy setup and freedom of being self-employed, but there is risk involved. There's no legal or tax separation between you and your business in a sole proprietorship. If someone sues your business, they can come after your personal assets.

Things to Consider When Choosing a Business Structure

When you begin weighing the  pros and cons of each business form , the sheer volume of information can seem overwhelming. The most important thing to consider is making sure your particular business model qualifies for your proposed business structure.

For example, if you are attempting to form an S-corporation, you can only have a limited number of shareholders.

Consider what regulations and reporting requirements you will have to follow depending on the structure you choose.

Drafting and Filing Documents When Forming an LLC

Creating a limited liability company (LLC) requires you to take several important steps depending on your state. You'll need to first file Articles of Incorporation with the Secretary of State.

All members of your LLC should enter into an operating agreement, setting forth the rights and rules of the newly formed company. In some instances, the LLC will also need to apply for a tax identification number.

Business Forms and Federal Tax Planning

Making the decision to start your own business is a huge endeavor. Tax planning and preparation is key to minimizing tax liability for your small business. Be sure to research U.S. tax codes, in addition to paying attention to changing tax laws each year.

How you choose to structure your business at the outset can have lasting implications for the future and affect your profit margin. For example, sole proprietorships do not file tax returns with the IRS. Instead, any business income or losses “pass through” to the owner's personal income tax returns.

On the other hand, C-Corporations (c-corps) are subject to “double taxation.” This means they are subject to corporate taxes as well as taxes on individual shareholder income.

Seeking Out a Business Attorney

Choosing a legal entity for your business takes research and effort to ensure you are complying with the laws. You may want to hire a business attorney to assist you with the more challenging aspects of small business formation, such as drafting and filing documents and complying with local laws. Whether you find yourself grappling with a business debt liability issue or just need some guidance on whether to go with a sole proprietorship, a local attorney experienced in business organization can help. 

Learn About Choosing a Legal Structure

Business formation quickstart.

Tutorials on how to start a sole proprietorship, partnership, corporation, LLC or a nonprofit.

Incorporation & Legal Structures Resources

Tax information, sample business structure agreements, state guides and do-it-yourself packages.

Incorporation & Legal Structures - Get Help

How a business lawyer can help you choose the right legal structure for your small business.

Sole Proprietorships

FAQs, tax information and advice for how to set up a sole proprietorship.

Partnerships

FAQs, tax primer, set-up guides, owner buyout agreements and other information about partnerships.

Corporations

FAQs and comparisons, tax basics and how-to guides for how to set up a corporation.

Limited Liability Companies (LLCs)

FAQs, checklists and information about how to set up an LLC.

Nonprofit and Tax-Exempt Organizations

Pros and cons of running a nonprofit, eligibility and set-up information.

Choosing a Legal Structure Articles

Benefits and Drawbacks of Different Types of Business Entities

Build Your Small Business: Financial Foundations

Business Form and Management of the Business: Pros and Cons

Business Form and Taxation: Pros and Cons

Business Forms and Federal Tax Law

Business Structures: Which One is Best for Your Business

Do's and Don'ts: Choosing a Business Form

Drafting and Filing Documents

Independent Contractors: Should You Form an LLC?

Investor Issues To Consider When Choosing a Business Structure

Picking a Business Form: Ten Things To Consider

Should My Small Business Form as a DBA, LLC, or Both?

Types of Business Structures

What Is a Business Entity?

What Is a PLLC?

What to Expect: Business Liability

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Determine the Legal Structure of Your Business

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• August 27, 2024

Starting a business is like building a house!

You need a solid foundation to keep it long-lasting. Here, the solid foundation is choosing the right legal structure for the business .

Even Michael E. Gerber shared in his book The E-Myth that “ The difference between the entrepreneur who succeeds and the one who fails is the legal structure they choose. ”

While almost 86% of U.S. small businesses opt for sole proprietorships because it’s simplest, it’s necessary to assess your firm’s long-term goals before making a choice.

Let’s see how to choose the right business structure and the factors to consider, in this blog.

What is the legal structure of a business plan?

The legal structure of a business plan defines how a business is organized and recognized by law. It shows the type of ownership, such as whether the business is owned by an individual, partners, or shareholders.

This structure determines how the business will be taxed and how profits and losses are distributed. It also defines the level of personal liability the owners have for business debts. The business structure impacts the daily operations, financial decisions, and legal obligations of the business.

What are the different types of business structures?

All business legal structures come with their requirements and liabilities. Additionally, the type of structure you choose will also influence the business licenses and permits you’d need to operate legally.

So, let’s see each structure in detail to know more:

1. Sole proprietorship

A sole proprietorship business structure is the most common structure. As the name itself says, it’s owned solely by a single individual.

Here, the owner has complete control over the decisions of the business and is personally responsible for the liabilities. Also, the profit earned from this business is calculated in the owner’s tax return (generally on Schedule C—Form 1040 ) only.

Businesses on a small scale use this structure as it requires minimal legal formalities. It’s also affordable, easy to set up, and simple to exit (no paperwork or particular announcement is needed).

It also means the owner has unlimited personal liability for any debts or legal actions against the business. In short, in a sole proprietorship , your business isn’t a separate legal entity.

2. Partnerships

Partnership involves two or more people who agree on sharing the ownership of a business. This structure is also easy to set up.

There are two main types of famous partnerships:

• General partnerships – all the partners are personally liable and responsible for the business
• Limited partnerships – one or more partners might have limited liability and responsibilities whereas one will be a general partner with full liability and responsibilities.

For the partnership structure, a partnership agreement is advised rather than keeping everything oral.

When filing taxes, the profits and losses of partnership businesses are passed on to the partners. Each partner is then required to file the taxes using Form 1065 . Generally, lawyers or professionals use this structure.

3. Corporations

A corporation is a formal structure where the owners and business are separate. The firm here is a separate business entity so it can own property, enter into contracts, file separate income tax forms, and do all other actions under its name.

As it’s a separate legal entity, it also protects the personal assets of the shareholders.

There are two types of corporations: C corporation and S corporation.

C corporations have no shareholder limit. But they face double taxation, with profits taxed at both the corporate level and as shareholder dividends. S corporations, conversely, avoid this double taxation but are limited to 100 shareholders.

Besides that, forming a corporation involves filing articles of incorporation, holding board meetings, voting, election of directors, and other important legal steps.

4. LLCs (Limited Liability Companies)

An LLC is a mixture of positives from both worlds (corporation and partnership). It’s a flexible structure with the limited liability of a corporation and the simplicity of partnership with tax benefits.

Setting up an LLC involves more paperwork and fees than a sole proprietorship or partnership, including filing Articles of Organization and creating an Operating Agreement. LLCs also need to follow state-specific rules.

Unlike an S Corporation, which is limited to 100 shareholders, an LLC can have unlimited members. However, setting up an LLC can be costly because it must register with the state. It also needs to hire an accountant and attorney to meet tax and legal requirements.

5. Cooperatives

Cooperatives are formed by people or businesses in similar industries who come together to achieve common goals. These goals can include improving purchasing power or gaining better market access.

Here profits are distributed among members based on their participation, not on how many shares they own.

Forming a cooperative requires drafting and filing Articles of Incorporation, creating bylaws, and sticking to state-specific regulations.

Factors to consider before choosing a business structure

Choosing the business structure affects your taxes, personal liability, ownership, and more. So, it’s important to consider all such factors. Here’s the table of comparison for each structure along with which structure is suitable for whom and the ease of formation. Let’s dive in:

Besides all the above factors, one other thing to consider is risk tolerance. Identify how much personal liability you’re willing to accept. If you want to protect personal assets then go for LLCs or corporations otherwise choose sole proprietorship or partnership.

Example of business structure in business plan

A well-chosen business structure will take your business a long way. Here are examples of how to write this section in your business plan:

Business structure of GreenLeaf Organics (LLC)

Our business, GreenLeaf Organics, will be organized as a Limited Liability Company (LLC). This structure was chosen to provide the owners with personal liability protection while allowing for tax flexibility, where business income will pass through to the owners’ personal income taxes, avoiding corporate taxation.

As an LLC, GreenLeaf Organics will be owned and managed by two partners, Jane Doe and John Smith, who will both have equal ownership and decision-making authority. The LLC structure also offers us the ability to bring in additional members in the future, which aligns with our long-term growth strategy.

Business structure of EcoClean Solutions (Sole Proprietorship)

EcoClean Solutions will operate as a Sole Proprietorship, owned and managed by Jane Doe. This structure was selected for its simplicity, allowing Jane to maintain full control over the business and make quick decisions. All profits will flow directly to her, and taxes will be reported on her personal income tax return.

However, as a sole proprietorship, there’s no separation between personal and business liabilities, meaning Jane will be personally responsible for any debts or legal obligations. While this structure is ideal for the early stages of the business due to low startup costs and ease of operation, there’s potential to transition to a more complex structure.

Business structure of BrightTech Innovations (C Corporation) 

BrightTech Innovations will be established as a Corporation (C Corp). This business structure was selected to facilitate our goal of raising substantial capital through equity financing. As a C Corporation, BrightTech Innovations can issue multiple classes of stock, making it an attractive option for venture capitalists and other investors.

The C Corporation structure provides strong liability protection for our shareholders, ensuring that their personal assets remain separate from the business’s liabilities. Additionally, this structure allows for unlimited growth potential, as there’s no cap on the number of shareholders.

While C Corporations are subject to double taxation—where both corporate profits and shareholder dividends are taxed—this structure aligns with our long-term strategy of scaling the business and eventually pursuing an Initial Public Offering (IPO). The ability to retain earnings within the company will also support ongoing research and development efforts without immediately distributing profits to shareholders.

Choosing the right legal structure is necessary for the long-term success of your business. We hope this blog has helped you choose the right structure.

Once you’ve made your decision, including it in the detailed business plan is the next essential move.

Upmetrics can help you seamlessly create a well-structured business plan that syncs with your goals and business structure.

So why wait? Start your business journey with Upmetrics today.

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Frequently Asked Questions

What is the best legal structure for a small business.

For small businesses, a sole proprietorship is often considered the simplest legal structure, offering full control to the owner. However, an LLC is another popular option because it provides tax flexibility and protects personal assets. Ultimately, the best business structure depends on the specific needs and goals of the business.

Can I change my business structure later?

Yes, you can change your business structure later if your business needs to evolve. However, the process can involve legal, tax, and administrative steps. So it’s important to consult with a legal or financial advisor to ensure the transition is smooth and compliant with regulations.

What legal structure should I choose if I plan to raise capital?

If you plan to raise capital, a corporation is often the suitable legal structure. It allows you to issue shares and provides limited liability protection.

While an LLC can raise capital, it’s more suited for smaller-scale investment from a few individuals.

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• Legal Structure of a Business
• LawDistrict ❯
• Legal Dictionary
• What Is a Legal Structure?

A legal structure is an organizational framework for how a business entity operates . Also called a business structure, a business form, or a business ownership structure, the proper legal structure depends on the size and type of your business and your business goals.

Typical business legal structures include sole proprietorships , limited liability companies ( LLCs ), partnerships (such as LLPs ), and corporations .

• How Do I Choose the Right Legal Structure?

Different legal structures come with distinct advantages and disadvantages. In most cases, the criteria you will evaluate to select the right format involve the following:

• owner liability
• expenses and procedures needed to create and run the business structure
• how the business will be taxed
• investment needs

Owner liability : The more risk involved with the service or product your business provides, the more important owner liability becomes.

Both corporations and LLCs offer business owners some personal liability protection against someone making claims against the business. In fact, this protection is one of the main benefits of an LLC. Conversely, owners of partnerships and sole proprietorships have little personal protection.

Expenses and procedures : Sole proprietorships and partnerships do not require much in the way of fees and documents to start a business . Partnerships do need to create a partnership agreement that specifies who does what in the company.

However, you must file articles of incorporation with your secretary of state's office and pay associated fees to establish a corporation or an LLC. Required fees and forms, such as an LLC operating agreement , vary from state to state.

In addition, the owners of businesses with these two business structures must elect officers to elect to run the company and maintain detailed records of any critical business decisions.

Taxes: The business structure you choose also affects your income tax status . Sole proprietorships, partnerships, and LLCs are "pass-through" tax entities, meaning the taxes on business profits and losses "pass through" to the owners on their personal income taxes. However, these owners must file taxes on all net profits from their business, even if they take no money out of the company during the tax year.

Unlike the "pass-through" structures, corporations are considered separate tax entities. These business owners pay taxes only on the profits they actually take from the business in the form of salaries, dividends, or bonuses. Also, the corporation pays taxes at a lower tax rate than some individuals do.

Investment needs: If your business relies on investors, then a corporation may be the right business structure. Structuring as a corporation allows a company to sell shares of ownership through stock offerings. The previous business structures cannot offer stock.

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FAQs About Business Structures

What about llc vs. sole proprietorship.

Deciding between an LLC and a sole proprietorship is a difficult choice when it comes to legal structure . Many entrepreneurs launch their businesses as sole proprietorships because they are easy and inexpensive to set up and maintain. All profits and losses "pass through" to the owner's personal tax return, and the owner does not need to pay business taxes.

However, a sole proprietorship is not considered a separate legal entity. Therefore, the owner has unlimited liability protection and can be held personally liable for the obligations of the business.

As their businesses grow, many sole proprietors restructure their businesses as LLCs , which offer the pass-through tax advantage and limited liability protection.

Is a business plan essential?

A well-thought-out business plan serves as a guide for launching and managing your business and choosing its legal structure . When you go through the steps of how to write a business plan , you'll be able to see more clearly what legal structure you'll need for your endeavor.

Traditional business plans use a standard structure and offer details on each aspect of the business. A lean startup business plan uses the same structure but summarizes the key elements.

Depending on your type of business and the structure you choose, you may need to apply for a business registration number . You will use this number to file taxes, open up a bank account, and conduct other official business.

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What Is A Legal Structure And Which One Is Right For Your Business?

Legal Structure And Which One Is Right For Your Business

Building a business is similar to building a house. You’ve got to build from the ground up, and without the proper foundation, everything else is suspect.

In business, the foundation is the legal structure chosen at the outset. It alone determines how the business is organized and addresses issues such as ownership liability, tax concerns and more. With so much at stake, it is easy to see why choosing the correct business model is crucial.

For those who are new to the business world, that may sound intimidating, confusing, or both. So the question is, which legal structure or “foundation” is best for your business?

Assessing The Options – An Overview Of Legal Structures For Business

Most people starting  “for profit” businesses in the United States have four choices regarding the legal structure for their new venture.  Choosing the one that’s best for you largely depends on what you want to accomplish and how you plan to do so.  But to begin with, here’s an overview of each one.

The first is a sole proprietorship. This is the most basic legal structure, and as such, it is the easiest to create and the most commonly used.  As its name indicates, there is just one owner, who receives all of the business’s revenues and is accountable for all of its shortfalls. Legally, there is no differentiation between the owner and the business itself, which has its advantages and disadvantages. Because the business isn’t taxed separately, filing the necessary returns is fairly easy. On the other hand, this means the owner is also  personally liable  for any debts the business incurs.

The second type of legal structure is a partnership.  The U.S. Small Business Administration defines it as “a single business where two or more people share ownership.” Together, the partners participate in all facets of the operation, benefit from the profits and share accountability for any and all losses. The extent to which they do so depends on the type of partnership arrangement (general partnership, limited partnership or joint venture). In any case, creating a partnership is relatively easy and inexpensive, and filing taxes is fairly straightforward. On the other hand, the partners are subject to “joint and several liability” when it comes to business decisions, transactions and any debt incurred.

The next type of legal structure is a limited liability company or LLC . It offers a great deal of flexibility with regards to ownership and reduced personal liability for the owners or “members.” The members also share profits, which are also reflected on their personal income tax returns. The disadvantage of creating an LLC in some states is that it must be dissolved when a member leaves unless the operating agreement specifies otherwise.

The last, and perhaps best-known legal structure is a corporation. The U.S. Small Business Administration defines a corporation as “an independent legal entity owned by shareholders.” Even though they “own” the corporation, shareholders are shielded from personal liability. But because forming one is trickier than creating other legal structures, it is seldom recommended for new, small businesses with few employees.

Additional Considerations

Starting a new business and choosing a legal structure for that business is often a daunting proposition. Before doing so, it’s important to evaluate your tolerance for risk; how much you can afford to spend on creating a legal structure; local and state requirements for creating different types of businesses; and tax status.

If you are still unsure about which legal structure to choose, a qualified attorney can assess your situation and determine which one is best. To learn more, call Jurado & Associates, P.A at ( 305) 921-097 6  or email  [email protected] .

Business & Immigration Lawyer to Entrepreneurs, Start-ups, Small Business and Foreign Investors. Romy Jurado grew up with the entrepreneurial dream of becoming an attorney and starting her own business. And today, she is living proof that dreams really do come true. As a founder of Jurado & Associates, P.A., a reputable business, real estate, and immigration law firm, Romy’s practice is centered primarily around domestic and international business transactions – with a strong emphasis on corporate formation, stock and asset sales, contract drafting, and business immigration. In 2011, Romy earned her Juris Doctor degree from the Florida International University College of Law. She is fluent in two languages (English and Spanish) and is the proud author of Starting a Business in the US as a Foreigner, an online entrepreneurial guide. Call 305-921-0976 or email [email protected] for a consultation.

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Writing a Business Plan – How to Plan Your Legal Structure

By: Author Tony Martins Ajaero

Home » Business Plans

Are you in the process of starting a business? How do you plan your business legal structure? What is the legal structure of a business plan? Well, I advice you read on to learn how to legally plan your business structure.

In case you are wondering where your business belongs, here are some common definitions:

• Sole proprietorship: A business that is owned and run by a single individual
• Partnership: A business created and sustained by the joint efforts of two or more individuals
• Corporation: A business that enables prospective shareholders to exchange money or property for capital stock

A business legal structure is a very important component of a business plan. When beginning a business you must decide what legal structure your business will assume. The most common business structures are sole proprietorship, partnership, C Corporation, and S Corporation.

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Your chosen structure determines which income tax return form to have to file. Making a final decision as to which legal structure your business would assume could be very tricky because each option has its own pros and cons. Now, let’s discuss each of these types of business structures.

Writing a Business Plan – How to Plan Your Legal Structure

1.  sole proprietorship.

A sole proprietorship refers to a business that is owned by one individual. Most businesses, especially small businesses are sole proprietorships by default unless they are stated to be otherwise. The owner of a sole proprietorship is expected to report all business profits and losses on their personal tax returns. This is because a sole proprietorship is not taxed separately.

Keep in mind, however, that by being a sole proprietor, you have unlimited liability to the business as well as its debts. This implies that if you happen to be sued ( or you have problems with paying up your debts ), your personal assets ( your house, cars ) will be at risk; alongside your business assets.

So, while a sole proprietorship has the advantage of not being taxed separately, it has the disadvantage of making you lose more than you can ever imagine should you run into debt or legal hassles.

2.  LLC ( Limited Liability Company )

This business structure was not widely known until recently. And now, it has become the most popular way for small businesses to get started. Although an LLC is taxed just like a sole proprietorship, it has the added advantage of a limited protection of a corporation.  Because the LLC is a fairly new addition to the business legal structures, you need to find out if your state or country’s business laws recognize LLCs.

As an LLC owner, you can use losses to offset income but only up to the amount you invested and not more. And in case you run into problems, your personal assets have more protection than in the case of a sole proprietorship. ( But this protection is not 100% ). However, one disadvantage of LLCs is that they are usually subject to additional state or franchise taxes.

3.  C Corp

A C Corporation is a taxable entity; it is taxed solely on its income rather than the owner being taxed. This offers a big advantage to the owner in that a C Corp can use an “ income splitting ” strategy to divide the profit realized from the business between the company and its owners.

This means part of the tax obligations are due on the corporation itself and the remaining part id taxable to the owners. This strategy could put both the company and the owner into lower tax brackets for tax savings.

But C Corps can be subject to double taxation on dividends paid out to shareholders, and this is the main disadvantage of this legal structure. When this happens, the corporation is taxed on the its income while the shareholders are also taxed on their dividends.

4.  S Corp

An S Corp doesn’t have to pay self-employment taxes on its income. So, this legal structure can provide some tax savings. But S Corporations are required to pay owner-employees a “ reasonable salary ” before they can pay out any dividends to shareholders.

However, the reasonable salary paid is subject Social Security and Medicare fees, both of which would sum to self-employment tax most of the time. S Corps can only enjoy significant tax savings when the company becomes a big income earner. Like C Corps, S Corps are intricate and cost more attorney and accountant fees at the time of tax.

To find the best legal structure for your business, search the web for more resources that give an in-depth explanation of the pros and cons of each option. Then assess your business to understand which option seems to be most suitable for it.

If you are having problems with choosing the most suitable legal structure for your business, you can consult a seasoned business lawyer or CPA (Certified Public Accountant) to help you decide which is right for you. While an attorney would help you protect your personal assets by helping you choose the right structure, an accountant would determine tax-reporting responsibilities for your chosen legal structure.

In conclusion , after deciding on the right legal structure for your business, you should educate yourself regarding your rights and responsibilities as a business owner. To know more about these, you can consult your local SBA ( Small Business Association ) or ( IRS ) Internal Revenue Service.

• <a title="Business Plan Industry Analysis" Go to Chapter 9: Y our Industry Analysis
• <a title="How to Write a Job Description" Go Back to Chapter Eight Part D: Writing your Business Plan Job Description
• <a title="How to Write a Business Plan Executive Summary" Go Back to Chapter 7 : How to Write a Business Plan Executive Summary
• <a title="The Beginner’s Guide to Writing a Good Business Plan" Go Back to Introduction and Table of Content

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How to Choose a Legal Structure for Your Business

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Last Updated on November 15, 2023 by Dr. Gabriel O’Neill, Esq.

Understanding how different business structures work and how they impact the growth of a business tends to be challenging since every business is different. This fact can make it hard to choose a legal business structure for your new venture. 

If you’re starting a business , it’s imperative to understand the various options in front of you and choose the right one from the get-go.

In this article, we’ll observe the main factors that influence how you choose your business structure, while also looking at the pros and cons of each option. This way, you can make an informed decision for your new business. 

What Is a Legal Structure for Your Business?

A registered business entity, or a business legal structure, is known as a government classification, which controls certain aspects of a business. It’s essentially the type of business you run in the eyes of the government. These types include LLCs (Limited Liability Companies), Partnerships, S-Corporations, and Sole Proprietorships, to name a few.

Your legal business structure influences your tax burden on a federal and state level. It also regulates how much liability a business faces in case of a lawsuit.

Moreover, your business structure determines if you need a board of directors and how often you should file paperwork. Depending on what structure you choose to register your business as, it either ensures that there’s no barrier between your business and personal taxes, or that there’s a strong one. 

Factors to Consider When You Choose a Business Structure

It can be hard for new entrepreneurs to choose a business structure. When trying to choose one, think about your financial needs, the ability of your business to grow, and the potential risks that might come with it. 

A business structure is not set in stone. You can always change it later. However, switching the legal business structure once you have registered your business is a complex process. Therefore, it’s recommended to thoroughly analyze your options before picking one.

Here are the factors you need to keep in mind when you choose a legal business structure. 

1. Flexibility of Your Business Plan

Return to your business plan and review all of your goals to see which business structure will be more suitable for you. The ideal business structure will align with all of your objectives. The business entity you pick should allow plenty of room for growth. 

In this case, an LLC offers the most flexibility when it comes to high growth potential. Plus, there’s lower risk and limited liability. 

2. Operational Complexity

Each type of legal business structure comes with its own costs and setup procedures, which also include complexities. Therefore, it’s recommended that new entrepreneurs pick a business entity that can easily be set up, comes with minimum legal formalities, and doesn’t cost a fortune. 

In this case, a sole proprietorship tends to be more straightforward as compared to other structures. However, it might be a bit hard to finance your business with external funding. 

3. The Level of Liability

When you choose a business structure, think about the extent you want your liabilities and assets to be protected. Certain structures offer limited liability protection that keeps the business owners’ assets safe in case the business goes through a loss or bankruptcy.

Alternatively, unlimited liability businesses offer full responsibility to the owner when it comes to legal issues or debts. New entrepreneurs need to take this critical factor into account as it’s going to affect their involvement in potential liability.

In this case, a corporation comes with the least personal liability due to being its own entity, while an LLC comes with the same protection but offers tax benefits similar to a sole proprietorship. In a partnership, the liabilities are shared between the different partners based on their agreement.

Your chosen business structure will also determine your tax obligations. This is because each entity is treated differently when it comes to taxation. Generally, sole proprietors get taxed on a personal level since the business and the owner is seen as one legal entity.

In the case of other entities like a corporation or an LLC, business owners are required to pay personal tax, corporate tax, or other specialty taxes that are charged by the government.

According to experts, you should avoid double taxation during the early stages of your business. An LLC structure can help with that by ensuring that you only get taxed as an individual and not as a company. Also, it helps to use a payroll service to help clarify taxation issues and payroll complexities. 

5. Responsibility and Control

Make sure you choose a business structure where you can handle a certain level of responsibility and control. For instance, when you’re the sole owner of a company, you have much more control as compared to being in a partnership or as a shareholder.

On the other hand, the more control you have, the more responsibilities you will have to take care of. In other business structures, such as a partnership, both the control and the responsibilities are divided between two or multiple people.

If you are willing to take on full responsibilities in addition to full control, then an LLC or a sole proprietorship business structure is the ideal choice. In the case of a corporation, there is a board of directors responsible for making important business-related decisions. 

Initially, a single person can handle a corporation, but as the business grows, the need for more people to take on certain responsibilities will grow as well.

6. Capital Investment

As a new business owner, you might need external funding of some sort to meet the costs of starting a business . In this case, corporations are more than likely to receive outside funding as compared to other business structures, like a sole proprietorship. 

A corporation can also sell its shares of stock in order to obtain extra funding for growth, but a sole proprietor can only get funds through personal credit, personal bank accounts, or by getting a partner. An LLC business goes through similar struggles, but the business owner does not necessarily have to use their personal assets or credit.

7. Business Permits and Licenses

You will require certain permits and licenses to operate once you register your business. Based on how you choose a business structure, you might need licenses on federal and state levels, in addition to the local level.

Each state has its own legal requirements for starting a business , and this includes business licenses . Most of the time, businesses aren’t aware of the licenses that are applicable to them. Take into account your business industry and the state you chose to launch your business in.

Types of Business Structure

Here’s a list of all the types of business structures with their pros and cons. This will help you choose a business structure that’s ideal for you. 

1. Sole Proprietorship

This is the most straightforward and simplest business structure. In a sole proprietorship, the owner has full rights to their business, including all responsibilities. 

• Offers complete control
• Does not have a lot of administrative work
• Offers low cost
• Offers tax deduction
• Comes with increased liability risks
• Hard to get outside funding

2. Partnership

This is an unincorporated business that’s owned by two or more owners. A partnership consists of people or other businesses. All profits get divided among the different owners while getting reported on each of their tax returns.   

• Comes with easy tax treatment
• Offers capital in the early stage
• Offers ease of operation
• There’s more expertise and knowledge 
• More attorney costs
• Arguments among partners
• Liabilities of different partners 

3. Limited Liability Company (LLC)

This is a hybrid business structure. Similar to a corporation, the owners’ or members’ personal liability is limited, but the profits can be taxed on a corporate level or a member level.

Here’s how to start an LLC .

• Comes with limited personal liability
• Has a favorable tax regime
• Offers improved credibility
• Increased paperwork and maintenance
• Offers limited options for investment
• There are costs for renewal

4. Corporation

This is a legal business structure that’s fully independent and it’s separated from the owners. There are several types of corporations in the US, where C-corps and S-corps are the most popular ones. Other corporation types include B-corps, nonprofit corporations, and close corporations.

• Offers limited liability
• There’s business continuity 
• Comes with secured business finance
• It can be costly to set up
• Risk of double taxation
• Comes with numerous obligations

5. Cooperative

Essentially, this is an employee-owned business, where each member has equal rights. It doesn’t matter how many shares each member owns, earnings and profits are equally divided among everyone.

• Employees are more invested
• There’s reduced liability
• More funding opportunities
• Comes with a lower overhead
• More tax advantages
• Not a profitable option for founders
• There are certain funding challenges
• Comes with legal restrictions

What Business Structure Is Best for Me?

So, what do you do when the time comes to choose a business structure? You take into account everything related to your business before making the final decision. For instance, if your business is based on a hobby such as video production, photography, blogging, and so on, then a sole proprietorship is the ideal business structure for you. 

However, if your business has the potential for growth and comes with a massive customer base, then a corporation or LLC will suit you better. These two business structures offer the most protection and a reduced risk of personal loss.

How to Choose a Business Structure – Conclusion

There’s no one-size-fits-all when it comes to business structures. Every business entity has its own unique elements and knowing how to properly utilize these elements is how you will have a successful business.

The ideal structure depends on the current condition of your business, and also where you want your business to be in the future. Therefore, choose a business structure according to your needs.

Read our article on avoiding common mistakes when you’re starting a new business.

About the author

Dr. Gabriel O'Neill, Esq.

Dr. Gabriel O'Neill, Esq., a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. O'Neill guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.

As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Gabriel O'Neill, Esq., is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.

Legal Requirements To Start A Small Business In 2024

Updated: Apr 17, 2024, 11:52am

With a fledgling business, passion for a product or service usually comes easily. Less exciting are the legal requirements for operating legitimately. Requirements vary dramatically depending on the industry, type of business and location. While there’s no substitute for advice from experienced legal counsel, this guide outlines some of the most important legal requirements to start a small business in 2024. Be sure you understand what’s needed before getting too far into your business planning.

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Business Structure and Designation Requirements

Once the mission and strategy of a business become clear, an important next step is to decide on the business’s legal structure. The choice you make can affect everything from the way you operate the business to the liabilities you’ll face to the way you pay taxes. Here are the most common options for small business owners:

Sole Proprietorship

The simplest structure for a one-owner business is a sole proprietorship. As a sole proprietor, a business owner has relatively few regulatory burdens and a high degree of control and flexibility. There’s no paperwork required to establish a sole proprietorship–it’s automatically created as soon as you start doing business. However, if you’ll be using a business name other than your own name, you’ll probably need to register your business name as a DBA with your state or locality.

A sole proprietorship does not form a distinct business entity, which means that there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner. This creates a risky situation for owners, as they’re on the hook for any legal or financial failures of the business. You can’t take on partners and remain a sole proprietorship, and your ability to get a loan for your business will hinge on your personal credit. Sole proprietors report business income and expenses on their personal tax returns, and they pay income and self-employment taxes on their profits. Some business founders use sole proprietorships to test a business idea before committing to a more formal structure and paying the higher fees associated with those structures.

Partnership

There are several kinds of partnerships. If you go into business with other people and don’t set up a formal business entity, your business is automatically considered a general partnership. Like sole proprietors, partners in a general partnership are fully liable for all business debts and obligations. They’re also liable for actions taken by their partners–a major reason why most lawyers encourage businesses to form an LLC or corporation rather than remain a general partnership. General partnerships are taxed similarly to sole proprietorships, with partners reporting their share of income, expenses, credits, profits and losses on their personal tax returns.

Other kinds of partnerships include:

• A Limited Partnership or LP, which stipulates that at least one “general partner” assumes personal liability for the business’s affairs, while other partners are passive investors with limited liability. Limited partnerships are common in certain industries such as real estate development.
• A Limited Liability Partnership or LLP, also provides limited liability for partners, but the specifics vary by state. In some states the liability protection is the same as for an LLC, but in other states the protection only extends to liability for other partners’ negligence. Some states require one general partner to remain fully liable. And some states restrict LLPs to certain licensed professionals like doctors, lawyers and architects.

Related: Limited Liability Partnership vs Limited Liability Company

Limited Liability Company

A Limited Liability Company or LLC balances the relative ease and flexibility of a partnership structure with the increased risk protection and potential tax advantages of a corporate structure. LLC owners (known as “members”) aren’t personally liable for business obligations. By default, LLC members are considered self-employed, and they file and pay taxes in the same way as owners of a general partnership or sole proprietorship. But an LLC can also elect to be taxed as a corporation. To set up an LLC, you must file articles of organization with your state.

An LLC should also have an operating agreement that details how the LLC will be run and the rights and responsibilities of the members.. Many small business owners choose LLCs for their simplicity and flexibility.

Corporation

With a corporation, the owners’ liability for business obligations is limited to the amount they have invested in the company–business creditors can’t go after their personal assets. Corporations have a well-defined organizational structure that includes a board of directors, officers, and owners, who are known as shareholders. A corporation may pay corporate income tax as a C-corp, or it may be eligible for pass-through taxation as an S-corp. Corporations tend to have more rigorous recordkeeping and reporting requirements than LLCs.

A corporation is formed by filing articles of incorporation with the state. Corporations should also have bylaws. Because corporations have a predictable structure and their shares are easy to transfer, corporations are well-suited to businesses hoping to attract outside investment.

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Business Name Registration Requirements

Business owners should explore several different ways to register and protect a business name:

Entity Names

If you form an LLC, corporation or other type of business entity, your business name will be registered with the state. The state won’t allow another business to be formed with the same name as yours.

A federal trademark helps protect a business name nationwide. You can apply for a trademark through the US Patent and Trademark Office . Though trademarks are not required to operate a business, registering a name may be a good idea to protect the exclusivity rights that come with a registered trademark.

A “doing business as” (DBA) is often also known as a “trade name” or an “assumed name.” You usually must register a DBA if your business is using a name other than its official legal name. Sole proprietorships and partnerships don’t need a DBA if they’re doing business under the owners’ names. LLCs and corporations don’t need a DBA if they’re using the business’s official name. It’s possible for multiple businesses in the same state to share the same DBA name. Depending on your state and the type of business you have, you may need to file your DBA with the state or with your locality.

A domain or web address is unique to the buyer and can be essential to a business’s online presence. Though there is no legal requirement to have a domain, obtaining a domain name that matches your business name can help you brand your business and minimize the chance your business will be confused with another business online. Having a domain name does not establish a business entity or fulfill any other legal requirements, nor does it give you the exclusive right to use your business name.

Tax Identification Numbers

A federal tax identification number, also known as an Employer Identification Number (EIN) is a nine-digit number for businesses. Almost all businesses must get an EIN, though sole proprietors and single-member LLCs with no employees may be able to use the owner’s Social Security number instead. You can get an EIN for free at the IRS website, which offers specific, detailed information about requirements on its EIN application page.

Licenses and Permits

Business owners should anticipate potential requirements from all levels of government:

A federally-issued license or permit is required for many businesses whose activities fall within a federally-regulated field, such as transportation, agriculture, alcoholic beverage production and sales, broadcasting and use of natural resources.

A state or local license or permit may be required in a variety of business categories as well, all depending on state and local law. For example, if you sell goods in a state that collects sales tax, you’ll need a seller’s permit. Most localities require businesses to obtain a general business license or permit. And you may have additional state or local licensing requirements that apply to your specific industry. City or county business licensing agencies can be good places to learn what special permits or licenses might be necessary.

Business Insurance

No matter how well a business is run, liability risks can never be eliminated. Risk is part of the cost of doing business, and it pays to be prepared. Depending on the circumstance, certain insurance policies may actually be legally required as a safeguard, much like personal auto insurance is.

Many businesses rely on an insurance broker to help determine the appropriate “coverages” (and amounts of coverage) for their situation, such as these common types:

General liability insurance is recommended as the bare minimum of coverage for any business. It insures against near-universal liabilities like damage to company property or personal injuries that occur as a result of doing business.

Product liability insurance covers alleged harm from defective products and might be important for businesses that produce and distribute goods of any kind.

Professional liability insurance , also known as “errors and omissions insurance,” covers claims of professional negligence on the part of any business employee.

Commercial property insuranc e offers additional coverage for land and facilities that could suffer damage from issues like fire, flood and vandalism.

Workers’ compensation insurance covers employees who get hurt on the job and is required for any businesses with employees in all states but Texas.

Auto liability insurance covers accidents involving company-owned vehicles and employees driving on company time.

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The Bottom Line

Depending on the location and type of business, getting a new small business properly registered, named, licensed and insured can be a daunting process. Doing this work right can prove worthwhile as legal troubles can pile up quickly—from regulatory agencies, other businesses, customers and even a company’s own employees. Business founders take on significant risks when starting a small business venture , but much of this risk can be mitigated by ensuring legal requirements to starting the business are taken care of as early as possible.

Frequently Asked Questions

How do i setup an llc.

Setting up your own limited liability company (LLC) can be done in 7 steps:

• Decide a business name
• Designate a Registered Agent
• Get a copy of your state’s LLC Articles of Organization Form
• Prepare the LLC Article of Organization Form
• File the Articles of Organization Form.
• Create an Operating Agreement
• Keep your LLC Active

What's the difference between an LLC and a corporation?

Limited liability companies (LLCs) and corporations are similar, but distinctly different business structures that come with their own strengths and weaknesses. In general, corporations have more standardized and rigid operating structures with more recordkeeping and reporting requirements.

What is the best business structure?

The best business structure for your business will depend entirely on what kind of company you form, your industry and what you want to accomplish. But any successful business structure will be one that will help your company set realistic goals and follow through on set tasks.

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Jane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.

Chauncey grew up on a farm in rural northern California. At 18 he ran away and saw the world with a backpack and a credit card, discovering that the true value of any point or mile is the experience it facilitates. He remains most at home on a tractor, but has learned that opportunity is where he finds it and discomfort is more interesting than complacency.

Choosing Your Legal Status: What Kind of Business Are You?

Starting a business is both exciting and terrifying.

First, there's finding the perfect idea that fills an obvious need. Then there's the challenge of gathering enough seed capital to tide business operations over for the next year or so.

In the meantime, your wildly successful marketing plan has customers beating down the doors to buy the product. Everything is falling into place faster than anticipated. But before taking the plunge into the rollercoaster world of gross revenues , there's one final question that must be answered...

What Kind Of Business Structure Do You Want To Follow?

At first glance, the hassles of establishing a legal business structure can seem like a fabulous way to waste precious time in local and state government offices when there's money to be made.

However, varying business goals require separate legal structures.

A tech startup company aiming for an eventual IPO will need a different setup than a privately held business wanting nothing to do with Wall Street shareholders. Likewise, a fashion designer will want different liability protections than a freelance writer.

Understanding your business model and what it does now will help narrow the choices for where you want your business to be in five or 10 years.

Hot Startup Seeks Angel Investors For Eventual IPO (C Corporation/ S Corporation)

Most technology startups dream of angel investors and a successful initial public offerings (IPOs). 'What typically happens is that [these types of companies] elect to become a C corporation with an S corporation tax status,' says Deborah Sweeney, CEO of MyCorporation Business Services .

C corporations are considered separate tax entities that file corporate tax returns, while S corporations are pass-through tax entities. This means all profits (or losses) earned by the business pass through to the owners' personal income tax returns and are thus taxed at the lower personal tax rate instead of the higher corporate rate.

Lower taxes are certainly helpful for new companies, but Sweeney advises to keep in mind that an S corporation tax status has restrictions a C corporation does not.

'In order to maintain an S corporation, you can only have one class of stock and you must not have more than 100 shareholders,' Sweeney cautions. 'These shareholders must be U.S. citizens, residents, and natural persons.'

This means S corporations must generally exclude corporate shareholders or partnerships, although certain trusts and estates may be eligible.

However, once company revenues take off, Sweeney advises taking a fresh look at that S corporation tax election. 'As you grow and consider whether to take on different types of shareholders, go back and drop the S status for the C status. This allows the company to issue multiple types of stock and will open the door to corporate shareholders like angel investors.'

No Thanks, Shareholders Are Too Demanding. But I Still Want Protection! (LLC)

Not all businesses need or want to go public.

For some business owners, keeping the company private -- retaining the earnings in-house while still minimizing personal liability -- holds a greater appeal than facing the constant stress of meeting shareholder earnings expectations.

For those privately held companies with no intention of going public , a limited liability company (LLC) is a common business structure, notes Sweeney.

An LLC offers the same pass through taxation and limited liability protections as an S corporation, but also allows an unlimited number of members and an unrestricted number of subsidiaries -- a distinct advantage where future business expansion is concerned.

Management is also more flexible. Whereas corporations have a board of directors and officers handling daily affairs, an LLC can be run either by the owners or by an elected manager.

LLCs will also open doors to loans as investors are typically more comfortable with an established legal entity than say, an individual sole proprietor.

But an LLC isn't just for big companies with multiple subsidiaries, either. 'Whether you are a giant or one person, you still want to protect your personal assets,' advises Peter Minton, president of Minton Law Group, P.C .

With an LLC, the owner has limited personal liability for the debts and actions of the company. 'Most people want to sleep at night knowing that their creditors or liabilities won't cause them to lose their house.'

The same goes for the downsized corporate manager who's thinking about starting an online t-shirt design business. 'People in fashion are concerned about trademark issues and want the flexibility and protection of an LLC,' says Minton. 'They want that extra formality of a corporation and to have that cachet.'

Really, I'm Just Not That Complicated (Sole Proprietor)

Is an LLC or S-corporation status truly necessary for every business owner?

Not really, concedes Minton. 'Freelance writing is probably one of the few careers I would recommend remaining a sole proprietorship because [writers] might not face the same amount of liability of say, a home improvement company.'

Nonetheless, he points out that it's far too easy for new business owners to spend countless hours figuring out which legal structure is the best fit.

'Everyone has different needs,' he says. 'Ultimately, you need to understand the differences between the legal entities, understand what they are, and make the decision on what is the best option for you.'

The Investing Answer: Who you are, what you are selling, and whether you want to be public or private in five or 10 years can influence the most important part of your business -- the bottom line .

It's worth the time to understand which legal structure will best fit your company's future needs, and your accountant and attorney can help you sift through the available options.

Legal Resources to help you further: NOLO.com, an excellent online resource, offers valuable legal information on business structures for business owners or new entrepreneurs. The IRS's Business Structure section can also point you in the right direction before entering your attorney's office.

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Business types at a glance

How it protects you, how it's managed and maintained, how it's taxed, how it can grow, frequently asked questions.

Both protect owners so they're not personally on the hook for business liabilities or debts. But, key differences include how they're owned (LLCs have one or more individual owners and corporations have shareholders) and maintained (corporations generally have more formal record-keeping and reporting requirements). Even though LLCs are considered easier to start and maintain, investors tend to prefer corporations.

The way you're taxed.

C corporation income is taxed twice—the business pays taxes on its net income, and then the shareholders also pay taxes on the profits they receive. With S corporation income, only the shareholders pay taxes on profits received.

Personal liability protection. An LLC protects owners from being personally on the hook for business liabilities or debts. A sole proprietorship doesn't.

LLCs, S corporations, and sole proprietorships are taxed once on profits received. C corporations are taxed twice; the business pays taxes at the corporate level, and shareholders pay taxes on income received. Nonprofits with 501(c)(3) status are exempt from federal income taxes.

LLCs, corporations, and nonprofits. You don't get personal liability protection with sole proprietorships or DBAs.

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