Planning on starting your own business? Then you’ll need to choose the right business formation.
There are four primary types, including LLC, corporation, partnership, and sole proprietorship, which each offer their own benefits and distinct advantages. If you aren’t sure which one is the best fit for your future business, here’s a breakdown of each and what you should know about them.
LLC
A limited liability company (LLC) provides business owners with liability protection while allowing greater flexibility in management and taxation. This less traditional corporate structure separates personal assets from business liabilities, which prevents owners from being personally liable for the business’s debts.
As a pass-through entity, an LLC avoids double taxation, meaning business income flows directly to members who report it on their individual income tax returns. Small businesses, freelancers, and startups often choose this structure for its balance of protection and simplicity.
Corporation
A corporate tax corporation, such as a C corporation, operates as a legal entity separate from its owners, shielding them from personal liability while giving them the ability to raise money through stock sales. Corporations must comply with more regulations than an LLC, including maintaining formal records, holding shareholder meetings, and paying corporate tax rates on corporate profits.
Some corporations—like benefit corporations—focus on social and environmental goals, while nonprofit corporations can receive tax-exempt status. Businesses planning to expand rapidly or become a publicly traded company benefit from this corporate structure.
Partnership
A general partnership involves two or more individuals sharing business responsibilities, profits, and liabilities. Unlike an LLC, a general partnership does not provide limited liability protection, meaning partners are personally liable for the business’s debts.
However, limited liability partnerships allow some partners to have reduced liability based on their investment level. Having a well-drafted partnership agreement outlines ownership percentages, decision-making authority, and how business profits are divided, which helps prevent disputes. Professional firms and businesses built on collaboration often use this structure.
Sole Proprietorship
A sole proprietorship is the simplest way to start a small business, with the owner retaining full control over business operations. However, this structure comes with unlimited liability, meaning the sole proprietor is responsible for all business taxes and debts.
Since a sole proprietorship is not a separate business entity, owners report business income on their personal tax returns and must pay self-employment taxes on earnings. This structure works well for individuals testing a business idea before committing to a more complex business structure.
How a Lawyer Can Help With Your Business Formation
- Assist with choosing a business structure that aligns with growth plans and liability preferences.
- File formation documents for common business entity types, including LLCs, corporations, and partnerships.
- They can advise on tax benefits, such as electing to be taxed as an S corporation to reduce self-employment taxes.
- Their experience helps businesses qualify for tax-exempt status, particularly for nonprofit corporations.
- A lawyer can help you navigate the complexities of business taxes, including how to pay taxes on business income and handle income taxes.
- Draft and review contracts, bylaws, and agreements to establish a strong legal foundation.
- Guide businesses through compliance with state and federal regulations to avoid costly mistakes.
- Evaluate how much administrative complexity each structure requires and recommend solutions for efficiency.
Schedule a Consultation With Garibian Law Today
At Garibian Law Offices, our attorneys specialize in business formation and contract drafting assistance to get your business off the ground, as well as commercial litigation services to help defend it. Reach out today to schedule a consultation and to learn the difference our legal knowledge can make in the success of your business.