Starting a business involves many important decisions. One of the first, and most important, is choosing the business’s legal structure. This choice affects taxes, personal liability, and how much control the owner has. Common structures include sole proprietorships, partnerships, limited liability companies (LLCs), and corporations (both S-Corps and C-Corps). Each has different advantages and disadvantages.
Understanding sole proprietorships
A sole proprietorship is the simplest structure. One person owns and runs the business. The owner reports business income on their personal tax return. This structure is easy to start, but the owner is personally responsible for all business debts and lawsuits.
Exploring partnerships
A partnership involves two or more people who agree to share in the profits or losses of a business. Partners should create a partnership agreement. This agreement outlines each partner’s role and responsibilities. Like sole proprietorships, partners may be held personally liable for the business’s debts.
Considering limited liability companies (LLCs)
An LLC provides some liability protection. The business’s debts and actions usually do not affect the owner’s personal assets. LLCs offer flexibility in how the business is taxed. The IRS can tax them as a partnership, sole proprietorship, or corporation.
Examining corporations
A corporation is a more complex structure. It is a separate legal entity from its owners. Corporations can raise money by selling stock. Shareholders own the corporation. A board of directors manages it. Corporations can be either C corporations or S corporations. C corporations face double taxation—the business pays taxes on its profits, and shareholders pay taxes on dividends. S corporations do not face double taxation; profits and losses pass through to the shareholders’ personal income.
Each business structure has different implications for taxes, liability, and control. Understanding the differences can help determine the right structure for a specific business.
