How to Choose a Business Structure

When starting a business, you need to choose a type of business structure— sole proprietorship, partnership, corporation or limited liability company (LLC). The type of business structure you select will determine liability issues, fees and regulations, tax payments and the possibility of issuing shares of stock.

Instructions

Difficulty: Moderately Easy

Things You’ll Need:

• Accountant and attorney
• Proper forms, if necessary

1. Consider liability issues. If you will be taking part in risky business activities (such as handling other people's money), you will want some sort of liability protection. Corporations and limited liability companies provide personal liability protection, which protects your personal assets from business debts. If you do not need such protection, you should opt for a sole proprietorship or partnership.
2. Determine the number of owners. A sole proprietorship has one owner, while a partnership has two or more owners. Corporations and LLCs can have one or several owners.
3. Take into account start-up fees and forms. Sole proprietorships and partnerships do not require any sort of forms or fees to start the business. Corporations and LLCs, however, require that you file paperwork with the state and pay a fee, which can be upwards of $500 depending on the state in which you create the business.
4. Examine tax ramifications. Owners of sole proprietors, partnerships and LLCs all report their share of the business profits (or loss) on their personal income tax returns. They must pay taxes on the net profits of the business regardless of how much they take out of the business. Paying taxes as a corporation is a little more complicated. Owners of corporations do not report their share of the business profits on their personal income tax returns. They only pay personal taxes on the amount of money they take out of the business through salaries and dividends. The corporation, however, does pay taxes on the profits left in the business each year.
5. Decide between a corporation and LLC. Corporations offer the opportunity to sell shares of stock in the corporation. This can be to your advantage if you want the business to go public or you are looking for investors. LLCs cannot issue stock. Corporations and LLCs both provide tax liability protection. Therefore if you do not need stock options, LLC is probably the best choice.

Tips & Warnings

• Consult an attorney and accountant before making a decision on what type of business structure to choose.
• Choosing a structure is not a permanent decision. You can change your business structure at a later date.
• Avoid entering partnerships with people you do not know or whose background you haven't investigated.