How to Choose the Best Legal Structure for Your Business

Legal structures shape your journey as a business, and choosing the best structure for your
company requires time and consideration. There are many types of business entities, each with
its own pros and cons. Your choice can greatly affect the way you run your business, impacting
everything from liability and taxes to control over the company.
The key is to figure out which structure gives your business the most advantages to help you
achieve your organizational and personal financial goals. We've outlined the most popular
business entities, and the factors to consider when choosing your business structure.
Types of business entities
1. Sole proprietorship
This is the simplest form of business entity. With sole proprietorship, one person is responsible
for all of a company's profits and debts.
"If you want to be your own boss and run a business from home without a physical storefront, a
sole proprietorship allows you to be in complete control, “This entity does not offer the
separation or protection of personal and professional assets, which could prove to become an
issue later on as your business grows and more aspects hold you liable."
2. Partnership
This entity is owned by two or more individuals. There are two types: general partnerships,
where all is shared equally; and limited partnerships, where only one partner has control of its
operation, while the other person or persons simply contribute to and receive only part of the
profit. Partnerships carry a dual status as a sole proprietorship or limited liability partnership
(LLP), depending on the entity's funding and liability structure.
"This entity is ideal for anyone who wants to go into business with a family member, friend or
business partner, like running a restaurant or agency together," said Sweeney. "A partnership
allows the partners to share profits and losses and make decisions together within the business
structure. Remember that you will be held liable for the decisions made, as well as those actions
made by your business partner."
3. Limited liability company (LLC)
A limited liability company is a hybrid structure that allows owners, partners or shareholders to
limit their personal liabilities while enjoying the tax and flexibility benefits of a partnership.
Under an LLC, members are protected from personal liability for the debts of the business, as
long as it cannot be proven that they have acted in an illegal, unethical or irresponsible manner in
carrying out the activities of the business.
"A limited liability company offers more protections and separations to businesses than sole
proprietorships and is a combination of a corporation and partnership," in a LLC personal assets
and company assets are separated in most cases, and your profits and losses are not taxed at the
corporate level."
4. Corporation
The law regards a corporation as an entity separate from its owners. It has its own legal rights,
independent of its owners – it can sue, be sued, own and sell property, and sell the rights of
ownership in the form of stocks.
There are several types of corporations, including C corporations, S corporations, B
corporations, closed corporations and nonprofit corporations.
● C corporations, owned by shareholders, are taxed as separate entities.
● S corporations avoid this double taxation, much like partnerships or LLCs. Owners also
have limited liability protection.
● B corporations, otherwise known as benefit corporations, are for-profit entities
structured to make a positive impact on society.
● Closed corporations, typically run by a few shareholders, are not publicly traded and
benefit from limited liability protection.
● Nonprofit corporations exist to help others in some way and are rewarded by tax
exemption.
5. Cooperative
A cooperative is owned by the same people it serves. Its offerings benefit the company's
members, who vote on the organization's mission and direction.
Factors to consider
For new businesses that could fall into two or more of these categories, it's not always easy to
decide which one to choose. You need to consider your startup's financial needs, risk and ability
to grow. It can be difficult to switch your legal structure after you've registered your business, so
choosing correctly at the start is crucial.
Flexibility
You'll want to ask yourself where your company is headed, and if your structure allows for it.
Turn to your business plan to align your goals with the proper structure. Your entity should
support the possibility for growth and change, not hold it back from its potential.
Complexity
When it comes to startup and operational complexity, there is nothing simpler than a sole
proprietorship. You simply register your name, start doing business, report the profits and pay
taxes on it as personal income. However, it can be difficult to procure outside funding.
Partnerships, on the other hand, require a signed agreement to define roles and percentages of
profits. Corporations and LLCs have various reporting requirements with the state and federal
governments.
Liability
A corporation carries the least amount of personal liability, since the law holds that it is its own
entity. This means that creditors and customers can sue the corporation, but they cannot gain
access to any personal assets of the officers or shareholders. An LLC offers the same protection,
but with the tax benefits of a sole proprietorship. Partnerships share the liability between the
partners as defined by their partnership agreement.
Taxes
An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal
income and taxed accordingly at the end of the year.
"As a small business owner, you want to avoid double taxation in the early stages," said Jennifer
Friedman, chief marketing expert at Expertly.com. "The LLC structure prevents that, and makes
sure you're not taxed as a company and as an individual."
Individuals in a partnership also claim their share of the profits as personal income. Your
accountant may suggest quarterly or biannual advance payments to minimize the end effect on
your return. 
A corporation files its own tax returns each year, paying taxes on profits after expenses,
including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as
for Social Security and Medicare, on your personal return for what you were paid throughout the
year.
Control
If it is important for you to have sole or primary control of the business and its activities, a sole
proprietorship or an LLC might be the best choice for you. You can negotiate such control in a
partnership agreement as well.
A corporation is constructed to have a board of directors that makes the major decisions to guide
the company. A single person can control a corporation, especially at its inception, but as it
grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the
rules intended for larger organizations – such as keeping notes of every major decision that
affects the company – still apply.
Capital investment
If you need to obtain outside funding sources, like investor or venture capital and bank loans,
you may be better off establishing a corporation, which has an easier time obtaining outside
funding than does a sole proprietorship. Corporations can sell shares of stock, securing additional
funding for growth, while sole proprietors can only obtain funds through their personal accounts,
using their personal credit or taking on partners. An LLC can face similar struggles, although, as
its own entity, it is not always necessary for the owner to use their personal credit or assets.
Licenses, permits and regulations
In addition to legally registering your business entity, you may need specific licenses and permits
to operate. Depending on the type of business and its activities, it may need to be licensed at the
local, state and federal levels.
"States have different requirements for different business structures," Friedman said. "Depending
on where you set up, there could be different requirements at the municipal level as well. As you
choose your structure, understand the state and industry you're in. It's not a 'one size fits all,' and
businesses may not be aware of what's applicable to them."
It's important to note that the structures discussed here only apply to for-profit businesses. If
you've done your research and you're still unsure which business structure is right for you,
Friedman advises speaking with a specialist in business law.