Selecting the Best Legal Form for your Business

When you start a business, you must choose the appropriate legal structure. Typically, you will begin to operate as a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. The objective is to understand how each legal structure works and then select the one that best meets your business and personal needs.

For many small businesses, the best initial choice is either a sole proprietorship, or if more than one owner is involved, a simple partnership. Either of these structures makes good sense in a business where personal liability is not a great risk. For example, a small service business in which you are unlikely to be sued and for which you will not be borrowing much money are best served without a corporate structure. Sole proprietorships and partnerships are relatively simple and inexpensive to establish and maintain.

If you are still unsure of you current legal situation it is recommended that you contact a business consultant, accountant, or lawyers. By working closely with an experienced professional you will not save time and money, and limit the possibility of a mistake in the future.

Legal Structures Available for Business Owners

Sole Proprietorships
Partnerships
Corporations (Profit and Non-Profit)
Limited Liability Company (LLC’S)

Business Legal Structures Advantages and Drawbacks

Type of Entity	Main Advantages	Main Drawbacks
SOLE PARTNER (1 INDIVIDUAL OWNER)
Sole Proprietorship	- Simple and Inexpensive to create and operate - Owner reports profit or loss on his or her personal tax return	Owner personally liable for business debts.
PARTNERSHIPS: (1 OR MORE OWNERS)
General Partnership	- Simple and inexpensive to create and operate - Owners (partners) report their share of profit or loss on their personal tax returns.	Owners (partners) personally liable business debts.
Limited Partnership	- Limited partners have limited personal liability for business debts as long as they don't participate in management - General partners can raise cash without involving outside investors in management of business	More expensive to create than general partnership
CORPORATIONS (SEPARATE ENTITY- 1 OWNER OR MULTIPLE)
Regular Corporation	- Owners have limited personal liability for business debts - Fringe benefits can be deducted as business owners can split corporate profit among owners and corporation, paying lower overall tax rate	- More expensive to create than partnership or sole proprietorship - Paperwork can seem burdensome to some owners separate taxable entity
S Corporation	- Owners have limited personal liability for business debts - Owners report their share of coporate profit or loss on their personal tax returns - Owners can use corporate loss to offset personal income from other sources	- More expensive to create than partnership or sole proprietorship - More paper work than for a limited liability company, which offers similar advantages - Income must be allocated to owners according to their ownership interests
Professional Corporation	Owners have no personal liability for malpractice or other owners	- More expensive to create than partnership or sole proprietorship - Paper work can seem burdensome to some owners, and all owners must belong to the same profession
Nonprofit Corporation	- Corporation doesn't pay full income tax - Contributions to charitable or religous purposes are tax-deductable - Fringe benefits can be deducted as business expense	- Tax advantages available only to groups orgnanized for charitable, scientific, educational, literary or religious corporation - Property transferred to corporation stays there; if corporation ends, property must go to another business
LIMITED LIABILITY COMPANIES
Limited Liability Company	- Owners have limited personal liability or business debts event if they participate in management - Profit and loss can be allocated differently than ownership interests -IRS rules now allow LLC's to choose between being taxed as partnership or corporation	- More expensive to create than partnership or sole proprietorship - State lawes for creating LLC's may not reflect latest federal tax changes
Professional Limited Liability Company	- Same advantages as a regular limited liability company - Gives state licensed professional a way to enjoy those advantages	- Same for a regular liability company - Members must all belong to the same profession
Limited Liability Partnership	- Mostly of interest to partners in old line professionals such as law, medicine, and accounting - Owners (partners) aren't personally liable for the malpractice of other partners - Owners report their share of profit or loss on their personal tax returns	- Unlike a limited liability company or a professional limited liability company, owners (partners) remain personally liable for many obligations owed to business creditors, lenders and landlords - Not available in all states and often limited to a short list of professions

Online resources

Below are additional website resources that are highly recommended.