Step 5 – Choose a Business Structure

The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk. You should choose a business structure that gives you the right balance of legal protections and benefits. 

Common Business Structures

  1. Sole Proprietorship
  2. Partnerships
  3. Limited Liability Company
  4. C Corp
  5. S Corp
  6. B Corp
  7. Close Corporation
  8. Nonprofit Corporation
  9. Cooperative

Sole Proprietorship

A sole proprietorship is easy to form and gives you complete control of your business. You're automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business.

Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name. It can also be hard to raise money because you can't sell stock, and banks are hesitant to lend to sole proprietorships.

Low-Risk

Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.

Business Structure General Trait Comparisons

Business StructureOwnershipLiabilityTaxes

Sole proprietorship

One person

Unlimited personal liability

Personal tax only

Partnerships

Two or more people

Unlimited personal liability unless structured as a limited partnership

Self-employment tax (except for limited partners)

Personal tax

Limited liability company (LLC)

One or more people

Owners are not personally liable

Self-employment tax

Personal tax or corporate tax

Corporation - C corp

One or more people

Owners are not personally liable

Corporate tax

Corporation - S corp

One or more people, but no more than 100, and all must be U.S. citizens

Owners are not personally liable

Personal tax

Corporation - B corp

One or more people

Owners are not personally liable

Corporate tax

Corporation - Nonprofit

One or more people

Owners are not personally liable

Tax-exempt, but corporate profits can't be distributed