Choosing a business structure is an important initial decision every entrepreneur must make. It impacts how much you pay in taxes, liability, financing options and ownership succession as well as many other factors. You also need to make this decision before registering your business with the state, getting your tax ID number and securing the proper licenses and permits. Needless to say, this decision will have long-lasting effects on your business so it’s best to consult an attorney, accountant and any other advisors to ensure you make the correct choice. You have several options to choose from:

Sole Proprietorship: A sole proprietorship gives you complete control over business. This is not a separate business entity from yourself; you will own all the assets of the business and the profits it generates. This also means you are fully responsible for any liabilities or debts of the business. Most small businesses get their start as a sole proprietorship, and if you don’t register as any other kind of business, you’ll automatically be considered one if you do any business activities.

General Partnership: For two or more people who want to own a business together, a partnership is the simplest option. A partnership needs a legal agreement that clearly outlines how business decisions and profits will be shared, how partners will be added or bought out in the future and how disputes will be settled. Much like proprietorships, the law does not distinguish between you and your business. Other than a general partnership dictated by an internal agreement, there are two types of partnerships: limited partnerships and limited liability partnerships.

• Limited partnerships (LP): One general partner has unlimited liability while all other partners have limited liability. Any profits are passed through to personal tax returns, and the general partner must also pay self-employment taxes.
• Limited Liability Partnership (LLP): Every owner has limited liability, giving each partner protection against debts of the partnership.

Corporation (C corp): Unlike proprietorships and partnerships, corporations are recognized as a distinct entity separate from yourself. They can make a profit, pay taxes and be held legally liable just like any person. The owners, called shareholders, are protected from personal liability, but because a corporation is an economic entity with a life of its own, the costs of recordkeeping, operational process and financial reporting are much higher. A key advantage to this business structure is the ability to raise funds through the sale of stock.

In addition to the typical C corp described above, there are also S corps, B corps, close corporations and nonprofit corporations. Each type of corporation is a bit different and has its own process for registering with a state.

Limited Liability Company (LLC): An LLC is a fusion between a corporation and a partnership. In most instances, an LLC will protect you from personal liability should it face lawsuits or bankruptcy, and profits and losses pass to your personal income without the need to pay corporate taxes. LLC members will be considered self-employed and will need to pay self-employment taxes for Social Security and Medicaid.

There are also non-standard business structures, such as an S corp LLC, that you may consider as well. You can read more about business structures by visiting SBA.gov.