Now that you have decided you want to start your own business, it’s time to decide which legal structure best suits your needs. The structure you choose can have different tax and liability implications, so it is important to choose carefully. While you should always seek professional tax and legal advice before making any final decision, below is a simple comparison of the most common legal structures for small businesses.
Sole Proprietorship
Pros
Easy to form
Complete control under 1 owner
Automatic designation if you are operating without obtaining licenses or permits
Cons
Business liabilities are not separated from personal assets
Not ideal for moderate or high-risk businesses
Difficult to find banks/investors willing to lend money
Partnership
Pros
Similar to sole proprietorship, but allows two or more owners
Owners can structure the partnership to meet their needs through a partnership agreement
Limited partnerships can protect the partners from the actions of the other partners
Cons
One partner may have full liability for the company, but also full control
Other partners may only be limitedly liable, but also only have limited control
If not formed correctly, partners can become liable for the actions of the other partners
Limited Liability Company (LLC)
Pros
Combines benefits of Corporations and partnerships
Personal assets are protected
Profits passed easily to personal income w/o corporation tax liability
Cons
Term of the LLC may be limited by state law
More difficult to form
More complicated tax filing
Corporation
Pros
Can have multiple shareholders
Full protection of personal assets
Different types to suit your business model
Easy to raise business capital by selling stocks or shares
Cons
May be subject to higher taxes
Strict formation requirements, including bylaws and mandatory annual meetings
May be subject to double taxation
Non-Profit/Cooperatives
Pros
Organized to provide charity or other public benefits
Eligible for grants and donations
Provides tax exemptions
Protects personal assets from liability
Cons
More complicated to form
Strict government oversight and auditing
Special regulations cover how income may be used
