Incorporation and Legal Structures
Should your small business be a sole proprietorship, a corporation, an LLC, a limited partnership or something else entirely? The kind of legal structure you choose for your business will depend on a number of factors, with implications for various liabilities, tax obligations, and investment needs. Here you will find resources to help you determine the appropriate legal structure for your business, including how-to guides to help you narrow your choices. This section also includes information about setting up non-profit organizations.
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As the name implies, a sole proprietorship is a company with one owner. There is no paperwork required to establish a sole proprietorship; you simply set up shop. But you still have to acquire all of the necessary licenses and permits. Individuals who start sole proprietorships typically use the term "DBA," which stands for "doing business." For example, the name of a sole proprietorship may be "John Smith, DBA John's Repair Shop."
But while they are cheap and simple to set up, sole proprietorships do not offer protections from liability. Profits from this type of legal structure are treated as simple income for tax purposes.
When two or more individuals share ownership of a business, including the profits and losses, it is structured as a partnership. Personal liability and management structures are generally based on what kind of partnership is formed: either general, limited, or limited liability.
- General Partnership - General partners share equal responsibilities and obligations, including profits, debts, and liabilities; taxes are paid through each general partner's personal income
- Limited Partnership - The personal liability of each limited partner is based (or limited) to the amount of their investment; although at least one of the partners must assume "general partner" status, which comes with greater liability and exposure to debts
- Limited Liability Partnership (LLP) - Limited partners are protected from much of the partnership's liabilities and debts, while offering some of the tax advantages of a general partnership
Limited Liability Companies
The limited liability company, or LLC, is best thought of as a hybrid of corporation and partnership. The owners of an LLC pay their business taxes as part of their personal income, while enjoying protections from personal liability. They are more complex than sole proprietorships and partnerships, but afford more protections. As a rule of thumb, business owners who want to shield their personal assets may want to consider forming an LLC.
The corporation is the most complex legal structure for a business. Corporations offer the best liability protections for owners and stand as their own legal entity. One way to look at it is that a corporation is treated as its own "person" for legal and fiduciary purposes. While a corporation may be sued, its officers typically are protected from liability associated with the business.
Unlike proprietorships, partnerships, or LLCs, corporations continue operations after the owners depart.
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