The legal structure you choose for your business affects how much personal liability you face, how you are taxed, how you raise money, and how much paperwork you handle. Below is a general comparison of the most common options in the United States. A business attorney and a tax professional can help you weigh them against your specific situation.
Sole Proprietorship
This is the default structure for a single individual doing business under their own name. It is simple and inexpensive to start, with no separate filing required in most states beyond local licenses. The trade-off is that the business and the owner are legally the same: business debts and lawsuits can reach personal assets, and income is reported on the owner's personal tax return.
General Partnership
When two or more people run a business together without forming a separate entity, they have a general partnership by default. Like a sole proprietorship, partners are personally liable for the business's obligations, and each partner can generally bind the partnership. A written partnership agreement is strongly recommended.
Limited Liability Company (LLC)
The LLC has become a popular middle ground. It is created by filing articles of organization with the state. Owners (called 'members') generally are not personally liable for company debts, much like shareholders of a corporation. By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, with the option to elect corporate taxation if it makes sense.
C Corporation
A C-corp is a separate legal and tax entity. Shareholders have limited liability, and the company can issue multiple classes of stock, which is helpful when raising venture capital. The trade-off is 'double taxation': the corporation pays tax on its profits, and shareholders pay tax again on dividends. C-corps also require more formalities, such as a board of directors, bylaws, and annual meetings.
S Corporation
An S-corp is a tax election rather than a separate entity type. An LLC or corporation that meets the eligibility requirements (limited number of shareholders, only certain types of shareholders, one class of stock, and others) can elect to be taxed as an S-corp. Profits and losses pass through to owners' personal returns, and active owners may save on self-employment taxes by paying themselves a reasonable salary plus distributions.
Limited Partnership and Limited Liability Partnership
Limited partnerships (LPs) have at least one general partner with unlimited liability and one or more limited partners whose liability is capped at their investment. Limited liability partnerships (LLPs) are commonly used by professional firms (such as law and accounting practices) and shield partners from liability for the malpractice of other partners, subject to state rules.
Factors to Weigh
- Personal liability exposure given the kind of work you do.
- How you want profits to be taxed and how you plan to pay yourself.
- Whether you intend to bring on investors or issue equity to employees.
- Administrative complexity and ongoing compliance costs.
- Your long-term plan: lifestyle business, sale, or outside investment.