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How to choose the right business structure for you

Choosing the right type of business structure matters when it comes to taxes and your personal assets.

One of the first steps to starting a business is picking a business structure, or business formation. The structure you choose impacts how you’ll pay taxes and how you’ll go about protecting your personal assets.

Types of business structures

There are four main types of business structures: Sole proprietorship, partnerships, limited liability companies (LLC) and corporations.

StructureBest for…DescriptionRequires Employer ID Number (EIN)
Sole proprietorship, or sole traderRunning your business on your own, with a simple setup with limited paperwork.You’re going it alone with complete control over your business. If you do business activities, you’re automatically considered a sole proprietorshipNot required, personal taxes.
Partnerships (LP, LLP and LLLPRunning a business with other owners.Two or more people can enter into a partnership, sharing the money, property, profits and losses of the business.Yes, a Partnership Tax ID EIN.
Limited liability companies (LLCGetting personal liability protection, and for a business with a more relaxed structure than a corporation.Limited liability protects your personal assets. Can be single-member, corporation or partnership.Will require an EIN if the LLC has employees, or is a single-member LLC.
Corporations (C corp, S corp, benefit, non-profitFor large-scale businesses and can offer the most protection for your personal assets and establish an easily scalable business.A business owned by its shareholders.Yes, a Corporation’s Tax ID EIN

How to choose your business structure type

There are multiple factors to consider before you decide which business structure to choose.

  • Liability risk. If you want your personal assets to be separated from your business, consider an LLC or a corporation. Sole traders get no legal distinction between business and personal assets.
  • Taxes. Your business structure will determine how you pay your taxes and whether you need an EIN — a tax identification number you’ll need to file a business tax return. Sole proprietors don’t need an EIN because they file business taxes alongside their personal returns, whereas LLCs and corporations need one.
  • Preferred ownership. If you want full control over your small business, a sole proprietorship is the easiest path to take that doesn’t require registration or dealing with shareholders. However, a single-member LLC can still offer control and liability protection.
  • Long-term goals. If you have plans to sell or scale your business significantly in the future, a corporation may be the best choice since it can sell stock and attract investors.
  • Administrative costs. Corporations have more extensive paperwork and record-keeping requirements, which can eat up a lot of time and money when forming a business. Those who are starting a business on their own may consider a sole proprietorship when first starting out.
  • Talk to professionals. If you’re looking for in-depth information about business taxes and liability protection, you can consult tax professionals and legal advisors.

LLC vs. sole proprietorship

If you’re already doing business and haven’t registered it with any government agency, your business is already considered a sole proprietorship, also known as a sole trader. With this structure, there is no legal distinction between the business and the owner. The owner is personally responsible for all aspects of the business, including its profits, debts and liabilities — which creates some risk for the owner’s personal assets.

A limited liability company (LLC) offers exactly what the name suggests: Liability protection. It offers its business owners limited liability protection, which means that the business owners aren’t personally responsible for the business’ debts or legal liabilities.

Because an LLC offers that limited liability protection, many businesses that start off as sole proprietors often opt to become an LLC.

LLC vs. corporations

Deciding between an LLC and a corporation ultimately depends on your goals and who you want the business owner(s) to be.

The main difference between an LLC and a corporation is that an LLC is owned by one or more people, and a corporation is owned by shareholders.

Both LLCs and corporations offer personal liability protection, meaning that your personal assets are tied to the business. For example, if your business were to be sued, your personal property wouldn’t be impacted.

4 common types of corporations

There are a few common types of corporations that work slightly differently — mostly when it comes to taxes:

  • C-corporation. This is the most common type of corporation, and it’s run by shareholders with limited liability for the shareholders and goes on indefinitely. But this structure can face double taxation, since the company pays corporate taxes on profits, and then the shareholders have to pay personal taxes on their dividends.
  • S-corporation. This structure allows you to avoid double taxation by passing on the profits directly to the shareholders, meaning they only have to pay income taxes. Some states might have limits on S-corps and requirements for who can be a shareholder and is limited to 100 shareholders.
  • B-corporation. B-corps are for-profit businesses with a mission to do public good. They’re taxed the same way as a C-corp, but shareholders are also responsible for holding the company accountable for its mission as well as its profits.
  • Nonprofit corporation. Also known as a 501(c)(3), nonprofits are structured like a C-corp but work solely to benefit the public good. Many qualify for tax-exempt status under certain conditions, meaning they don’t have to pay any taxes on profits they make — but there are restrictions on how they can use those funds.

Bottom line

Consider your legal responsibility, tax obligations and the work it takes to set up and maintain different business structures before you decide which one to choose. After you’ve picked your business structure, you’re ready to start thinking about how to create a business plan — which you need to attract investors or apply for a business loan.

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