An aspiring entrepreneur must choose a business structure as one of their first key decisions. Legal liability and taxes depend on your choice of registration type-LLC, sole proprietorship, partnership, etc. While simple proprietorships appeal to beginners for simplicity, incorporating as an LLC or partnership offers additional protections. There are tradeoffs to weigh for each path.

Sole proprietorship

A sole proprietorship is when one person solely owns the business. It’s the simplest option requiring minimal registration paperwork. You don’t have to register a business name or file formation documents.

Pros

• Easy and inexpensive to form. Just start doing business.
• You control all decisions and retain all profits.
• Easy tax preparation; profits and losses go on your return.
• No corporate fees or formal processes.

Cons

• You are personally liable for all debts and legal actions against the business. Your assets are at risk.
• Harder to raise investment capital and take on partners.
• Limited options for tax savings as a pass-through entity.

Sole proprietorship is ideal for part-time ventures, freelancers, small online shops, and sole consultants.

LLC

A limited liability company (LLC) separates your assets from the business. It’s a more formal corporation that requires articles of organization and an operating agreement.

Pros

• Liability protection where only assets within the LLC are liable in lawsuits. Personal assets remain safe.
• More credibility with banks and customers. Perceived as more legitimate.
• Ownership flexibility through managing members vs just shareholders.
• Easier to take on investment and bring on partners.

Cons

• More paperwork to form an LLC and memos of the organization. Requires ongoing compliance like annual reports.
• Keeping personal vs. LLC finances separate is crucial.
• Typically requires an EIN and business bank account. Higher accounting costs.

LLC is completely suitable option for Storefronts, restaurants, and companies needing liability protection.

Partnership

A partnership is two or more people structuring their business together. You register general or limited partnerships and file a partnership agreement.

Pros

• Easier to raise capital and expand with multiple partners investing.
• Compliance requirements less than a corporation.
• Partners collectively contribute their skills, knowledge, and resources.
• Income passes through to be taxed at the individual level.

Cons

• Partners are equally liable for each other’s actions related to the business.
• Disagreements between partners jeopardize the business if not addressed.
• Partnership interests cannot be easily bought or sold. Not a good fit for outside investors.
• Still not as much liability protection as an LLC.

Only Small joint ventures, professional firms, and teams of skilled partners can adapt with Partnership.

Also consider the following points as well when choosing a business structure:

• Corporation – This type of structure requires substantial legal paperwork and compliance. Corporations offer the highest level of personal liability protection but come with more tax considerations. Corporations are better suited for companies planning to go public or with intentions of eventually selling. browse around this site to find out more.
• Non-profit – You would register with the IRS as a non-profit organization (501(c)(3). There are restrictions on the types of charities and public works non-profits engage in. Board oversight and missions centred on public good are required.
• State Requirements – Business formation laws vary between states, so carefully review each state’s specific requirements before starting the structuring process.

The optimal business structure evolves as your company grows and changes. Weigh your options carefully at each new stage of expansion. Thoroughly understanding the pros and cons of each type of structure leads to the best fit.