Types of Business Structures:
Sole Proprietorship
Corporation
Limited Liability Company
Partnership
Sole Proprietorship
Personal Liability: Business owner has unlimited liability for business debts and lawsuits
Formalities: Virtually none
Management: Can only have one owner
Taxation: Business is not taxed separately from the owner
Recommended For: Business only needs owner to operate; Business doesn't need funding or employees; Business doesn't have customers/clients and doesn’t deal with money
Does this sound like an entity that you want to choose? No matter what anyone tells you, forming a sole proprietorship is a huge NO! Unless, you're okay with being sued for everything you personally own.
Corporation
Personal Liability: Shareholders are not typically liable for the debts of the corporation.
Formalities: Complex tax and legal requirements; Formal board of directors, shareholder meetings, meeting minutes, bylaws and record keeping are required as well as annual state registration.
Management: Managed by the board of directors, who are usually elected by the shareholders. Directors may appoint officers, who run the daily operations.
Taxation: Taxed at the entity level. If dividends are distributed to shareholders, dividend income is also taxed at the individual level.
Recommended For: Owners needing maximum tax and ownership flexibility combined with liability protection, and don’t mind adhering to the corporate formalities and record keeping burdens; Ability to sell shares to raise capital.
SO much to keep up with when you are just starting out! Keep in mind, you can always convert to a corporation in the future.
Partnerships
Personal Liability: Liability protection may vary by state; many times, at least one partner has unlimited liability.
Formalities: Relatively few formal requirements.
Management: Flexible management and operational structure.
Taxation: Income and losses are passed through to owners.
Recommended For: Owners wanting minimal formalities and maximum flexibility; Can afford good insurance; Want to structure business as employees climbing up to partner level.
Limited Liability Company
Personal Liability: Members are not typically liable for the debts of the LLC.
Formalities: Formal meetings and minutes are not required; however, annual state registration is required.
Management: Management is flexible. Typically, an operating agreement outlines management duties.
Taxation: By default, there is no tax at the entity level; income and losses are passed-through to the members’ individual tax returns. LLCs may also elect to be taxed as a C- or S-Corporation.
Recommended For: Best for owners wanting strong liability protection with minimal corporate formalities, and the simplicity of pass-through taxation.
A LLC is the best choice for entrepreneurs, creatives, and visionaries. You have protection against liabilities, provided that you maintain the few formalities.