Should your small business have a sole proprietorship, corporation, LLC, limited partnership, or something else entirely? The type of legal structure you choose for your business will depend on a number of factors, with implications for various liabilities, tax obligations, and investment needs.
Constitution and Legal Structures: What is the ideal legal structure for a Business
Here you will find resources to help you determine the appropriate legal structure for your business, including how-to guides to help you narrow down your options. This section also includes information on creating non-profit organizations.
As the name implies, a sole proprietorship is a business with one owner. No paperwork is required to establish individual property; you simply set up a store. But you still have to acquire all the necessary licenses and permits.
Individuals who start individual properties typically use the term “DBA,” which means “to do business.” For example, the name of a sole proprietorship might be “John Smith, DBA John’s Repair Shop.”
But while they are cheap and easy to install, individual owners offer no protection against liability. The gains from this type of legal structure are treated as simple income for tax purposes.
When two or more individuals share ownership of a business, including profits and losses, it is structured as a partnership. Personal liability and management structures are generally based on the type of partnership that is formed: either general, limited, or limited liability.
- General Conference – General partners share the same responsibilities and obligations, including profits, debts and obligations; taxes are paid through the personal income of each general partner
- Limited Association – The personal liability of each limited partner is based (or limited) to the amount of their investment; although at least one of the partners must assume the status of “general partner”, which entails greater responsibility and exposure to debts
- Limited Liability Association (LLP) – Limited partners are protected from much of the partnership’s obligations and debts, while offering some of the tax advantages of a general partnership
Limited Liability Companies
The limited liability company, or LLC, is best thought of as a hybrid of a corporation and partnership. LLC owners pay their business taxes as part of their personal income, while enjoying personal liability protection. They are more complex than sole proprietorships and partnerships, but offer more protections. As a general rule of thumb, business owners who want to protect their personal assets may consider forming an LLC.
The corporation is the most complex legal structure for a business. Corporations offer the best liability protections for homeowners and are their own legal entity. One way of looking at it is that a corporation is treated as its own “person” for legal and fiduciary purposes. While a corporation can be sued, its officers are typically protected from the liability associated with the business.
Unlike owner companies, partnerships, or LLCs, corporations continue their operations after the owners leave.