Your business structure affects everything from daily operations to taxes and personal liability. It’s important to pick one that offers the right balance of legal protections and benefits. We will explore the five main business structures.
Sole Proprietorship
Easy to Form: You have complete control.
Personal Liability: Your personal and business assets are not separate.
Funding Challenges: Harder to raise money since you can’t sell stock.
Partnership
Simple for Multiple Owners: Ideal for two or more people.
Types: Limited Partnerships (LP) and Limited Liability Partnerships (LLP).
LP: One general partner with unlimited liability; others have limited liability.
LLP: All partners have limited liability and are protected from each other’s actions.
Limited Liability Company (LLC)
Best of Both Worlds: Combines benefits of Corporations and partnerships.
Personal Asset Protection: Your personal assets are generally safe from business liabilities.
Tax Flexibility: Profits and losses can pass through to your personal income without facing corporate taxes.
Limited Life: In some states, an LLC may need to be dissolved and re-formed if a member joins or leaves, unless there’s an agreement in place for ownership changes.
Good for Medium- or Higher-Risk Businesses: Ideal for those with significant personal assets to protect and those seeking lower tax rates than Corporations.
Corporation (C-Corp)
Separate Legal Entity: Can make a profit, be taxed, and held legally liable.
Strongest Personal Liability Protection: Owners are protected, but forming a corporation is costlier and requires more paperwork.
Double Taxation: Profits are taxed at the corporate level and again as dividends on personal tax returns.
Independent Life: Continues to operate even if shareholders change.
Raising Capital: Can sell stock to raise funds and attract employees.
Good for Medium- or Higher-Risk Businesses: Suitable for those needing to raise money or planning to go public.
S-Corporation (S-Corp)
Avoids Double Taxation: Profits and losses pass through to owners’ personal income without corporate tax rates.
State Variations: Not all states tax S-Corps the same way.
IRS Filing Required: Must file for S-Corp status with the IRS.
Independent Life: Continues to operate even if shareholders change.