Choosing a business legal structure influences the day-to-day operations of your business. It affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. You also need to choose a structure before register your business with the state, get a tax ID number, or file for any licenses and permits.
Choose carefully. While you may be able to convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications.
Consulting with business counselors, attorneys, and accountants is always the best option.
Below is a chart from the U.S. Small Business Administration, along with more detailed information.
Sole Proprietorship - a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business
- Easy to form and gives you complete control of your business
- Do not produce a separate business entity - business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business.
- Able to get a trade name. It can also be hard to raise money because you
- Can't sell stock, and banks are hesitant to lend to sole proprietorships
Partnership - a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.
- Simple structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).
- Limited Partnerships (LP) -
- One general partner with unlimited liability and all other partners have limited liability
- Partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement.
- Profits are passed through to personal tax returns, and the general partner (the partner without limited liability) must also pay self-employment taxes.
- Limited Liability Partnerships (LLP) -
- Similar to limited partnerships, but give limited liability to every owner.
- Protects each partner from debts against the partnership - won't be responsible for the actions of other partners.
- Limited Partnerships (LP) -
Limited Liability Company (LLC) -
- Takes advantage of the benefits of both the corporation and partnership business structures.
- Protect you from personal liability in most instances
- Personal assets (like your vehicle, house, and savings accounts) won't be at risk in case your LLC faces bankruptcy or lawsuits.