Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. The business structure you choose affects everything from day-to-day operations to taxes and how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protection and benefits.
Review Common Business Structures
Sole Ownership
A sole proprietorship is easy to set up and gives you complete control over your business. You are automatically considered a sole proprietor if you run a business but do not register as another type of business.
Individuals do not create a separate business entity. This means that your business assets and liabilities are not separate from your personal assets and liabilities. You can be personally liable for the debts and obligations of the business. Sole proprietors are still able to acquire a trade name. It can also be hard to get money because you can’t sell stock and banks are hesitant to lend to sole proprietors. A sole proprietorship can be a good option for low-risk businesses and owners who want to test their business idea before creating a more formal business.
Partnership
Partnerships are the simplest structure for two or more people to jointly own a business. There are two common types of partnerships: limited partnerships (LPs) and limited liability companies (LLPs).
Limited partnerships have only one general partner with unlimited liability and all other partners have limited liability. Limited partners also tend to have limited control over the company, which is documented in the articles of association. Profits are reflected in personal tax returns, and a general partner must also pay self-employment taxes.
Limited liability companies are similar to limited partnerships, but they provide limited liability to each owner. An LLP protects each partner from debts owed to the partnership, it is not responsible for the actions of other partners. Partnerships can be a good option for businesses with multiple owners, professional groups (such as lawyers), and groups that want to test their business idea before forming a more formal business.
Limited Liability Company (LLC)
An LLC allows you to enjoy the benefits of both corporate and partnership business structure.
While an LLC protects you from personal liability in most cases, your personal assets such as your vehicle, home, and savings accounts will not be at risk if your LLC faces bankruptcy or lawsuits.