Choosing the right business structure is a key decision for any entrepreneur starting a new venture. The structure you choose can have major impacts on your personal liability, taxation, and management flexibility. This infographic outlines four common options.
Sole Proprietorship
The sole proprietorship is the simplest but least protected structure. It is not a separate legal entity – you as the owner are personally responsible for all debts, losses and liabilities. Income and losses flow directly to you. Easy to set up and no corporate taxes, but significant personal liability. Best for simple businesses with low risks. You must report all business income on your personal taxes.
Partnership
A partnership is formed between two or more people to share ownership and responsibility. There are both general and limited partnerships. In a general partnership, all partners are jointly liable for debts and legal obligations. Shared profits flow directly to partners’ personal taxes. Setup is minimal and flexibility is high. General partnerships carry high personal liability but allow shared skills and investment. Limited partnerships have general partners overseeing operations and limited partners providing capital with limited liability. More complex to establish formal agreements.
Limited Liability Company (LLC)
If you want personal liability protection but pass-through taxation, a limited liability company (LLC) offers the best of both worlds. An LLC is a separate legal entity that shields your personal assets. Profits pass through to members’ personal taxes avoiding double taxation. Less paperwork than a corporation. LLCs allow greater flexibility in ownership and management structure than S-corps. State laws vary, so discuss options with advisors.
S-Corporation
An S-corporation provides liability protection without double taxation. S-corps are a special tax status elected by qualifying corporations. They function similar to LLCs, but with stricter ownership rules – no more than 100 shareholders allowed. Profits pass through to shareholders’ personal taxes. Operational flexibility is similar to a partnership. Owners must follow corporate formalities. Better suited for businesses seeking VC funding. Consult your tax advisor about eligibility.
This article is intended to provide you with a quick overview of some common business structures. If you need more information to help narrow down your decision, I like to refer to this article on Investopedia for further detail.Â