Legal Organizational Structure

You have four choices for your business' organizational structure.

When you start a business, you must decide how to organize it. The type of business structure determines tax liability and the responsibility for legal issues. There are four basic structures: sole proprietorship, partnership, corporation and limited liability company.

Sole Proprietorship

A sole proprietorship is a company with a single owner. You are personally responsible for all income tax, debt accrued and legal actions concerning your company.

Partnership

A partnership is a company with two or more people who share debt and profits. This type of company pays no income tax. Instead the company's profits are distributed to the partners and each partner files income taxes on those profits.

Corporation

In a corporation, also known as a C Corporation, shareholders own the company. A corporation pays income taxes on company profits and the shareholders pay taxes on any dividends received. A corporation is considered a legal entity and owners are not personally liable for debts or legal actions.

S Corporation

An S Corporation's legal structure is identical to a C Corporation but taxation is different. Income taxes are paid on the stockholder's dividends but no taxes are paid by the corporation.

Limited Liability Company

A limited liability company (LLC) is taxed like a partnership and the owners have limited personal liability for company debt and legal actions similar to a corporation.

References

• Internal Revenue Service: Business Structures
• U.S. Small Business Administration: Choose a Structure