Deciding on the legal structure is one of the most important decisions you will make when starting a business. You will probably decide on the legal structure early in the business formation process. However, your choice will have long-term impacts on the amount of taxes you pay, the amount of paperwork your business must complete and the amount of personal liability you may be responsible for.
There are several legal structures to choose from. Four of the most common types of structure include a sole proprietorship, a partnership, a corporation and a limited liability company (LLC).
A sole proprietorship gives you complete control of your business, but your business assets and liabilities are not separated from your personal ones. This means you can be held personally liable for business debts. However, it is an easy structure to set up and can be an appropriate choice for low-risk businesses.
A partnership is a simple structure that allows two or more people to jointly own a business. Owners agree to share in the liabilities for the business, and business’s profits and losses pass through to each owner's personal income.
A corporation is a legal entity that is separate from its owners. Because of this, the corporate structure can be more complicated and expensive than other structures. However, it does protect you from being personally liable for the corporation’s debts, and corporations are able to sell stock to raise money.
Limited liability company
An LLC structure offers some benefits of the partnership structure and some benefits of the corporation structure. It allows your business to be a separate entity, which protects you from personal liability in most situations. It also allows profits and losses to pass through to your personal income without the business being taxed.
There are many options to choose from when it is time to decide the legal structure for your business. To make the right choice for your situation, it is important to have a full understanding of the impact each option could have on your business and on you personally.