Business Structures and Formation

Choosing the right business structure is one of the most important legal decisions an entrepreneur makes. Each structure has different implications for liability, taxation, and management.

Sole Proprietorship

A sole proprietorship is the simplest form — one person owns and operates the business. No formal filing is required (beyond local licenses). However, the owner has unlimited personal liability for all business debts and obligations.

Partnership

A partnership involves two or more people sharing ownership. Types include:

General partnership (GP) — all partners share management and liability

Limited partnership (LP) — has both general partners (who manage and have unlimited liability) and limited partners (who invest but have liability limited to their investment)

Limited liability partnership (LLP) — all partners have limited liability; common among law firms and accounting firms

Corporation

A corporation is a separate legal entity from its owners (shareholders). Key features:

Limited liability — shareholders are generally not personally liable for corporate debts

Perpetual existence — the corporation continues even if owners change

Double taxation — the corporation pays corporate income tax, and shareholders pay tax on dividends

S Corporation election avoids double taxation by passing income through to shareholders

Limited Liability Company (LLC)

An LLC combines the liability protection of a corporation with the tax flexibility of a partnership. Members can choose to be taxed as a sole proprietorship, partnership, or corporation. LLCs are governed by an operating agreement.

Key Considerations

When choosing a structure, consider:

Liability protection — how much personal risk are you willing to accept?

Tax implications — pass-through vs. double taxation

Fundraising needs — corporations can issue stock; LLCs cannot (easily)

Management structure — do you want centralized or flexible management?

State requirements — formation rules vary by state

Business Structures and Formation