5 Most Common Legal Business Structures and How to Choose

Determining the type of legal business structure can feel scary and overwhelming. This step is absolutely one of the most critical decisions you MUST make when starting a business. I have compiled a guide of the 5 most common types of legal business structures, what they are and why you would choose them.

The type of structure you chose can have significant tax implications as well as varying levels of personal risks. This guide is intended to provide you with level of detail you need to choose your business structure.

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*DISCLAIMER- I am not a lawyer and none of this is legal advice.

5 Most Common Types of Legal Business Structures

Here is a list of the 5 most common types of legal business structures for you to consider

• Sole Proprietorship
• Partnership
• Limited Liability LLC
• Corporation
• Non Profit

How to Choose the Best Business Structure for your Business

Sole Proprietorship

Why you might structure your business as a Sole Proprietorship

Are you a solopreneur and starting a small business?

A sole proprietorship is a type of business structure in which an individual operates and owns the business. Here are some reasons why a business owner might choose to set up their business as a sole proprietorship:

• Simplicity: Setting up a sole proprietorship is relatively simple, and usually only requires obtaining any necessary licenses and permits.
• Control: As the sole owner of the business, you have complete control over all aspects of the business, including decision making, management, and use of profits.
• Flexibility: A sole proprietorship allows for flexibility in terms of how the business is run, and there are fewer legal and financial requirements to comply with.
• Low start-up costs: Starting a sole proprietorship usually involves lower start-up costs compared to other business structures, as there are no incorporation fees or ongoing maintenance costs.
• Potential for tax savings: Sole proprietors can claim business expenses on their personal income tax returns, which can result in significant tax savings.
• Personal engagement: As the sole owner and operator, you have a personal stake in the success of the business, which can increase engagement and accountability.

It’s important to note that one of the main disadvantages of a sole proprietorship is that the owner is personally liable for all debts and liabilities of the business, meaning that personal assets are at risk in the event of a lawsuit or financial difficulties. It’s always good to consult with a legal or financial advisor before making a decision.

Partnership

Why you might choose a Partnership.

A partnership is a business structure in which two or more individuals share ownership and management of the business. Here are some reasons why a business owner might choose to set up their business as a partnership:

• Shared ownership: Partnerships allow multiple individuals to share ownership of the business, which can make it easier to raise capital and bring in new ideas and skills.
• Shared management: Partnerships also allow multiple individuals to share management responsibilities, which can make it easier to distribute tasks and responsibilities among the partners.
• Shared profits: Partnerships allow the partners to share profits based on their agreed percentage of ownership, which can be a motivator for each partner to work hard and contribute to the success of the business.
• Flexibility: Partnerships have a lot of flexibility in terms of how they’re structured, and partners can negotiate their own terms and agreements in terms of how to share profits, responsibilities, etc.
• Lower costs: Setting up a partnership often requires less formalities and compliance requirements than setting up a corporation, and so it can be a more cost-effective option for some businesses.
• Personal engagement: Having a partner can increase personal engagement and accountability. A partner can help keep each other on track, motivated and focused on the business.

It’s important to note that partnerships also come with their own set of challenges, such as the potential for disagreements among partners, and the fact that partners are personally liable for the debts and liabilities of the business. It’s always good to consult with a legal or financial advisor before making a decision.

Limited Liability LLC

Why you might choose an LLC

A limited liability company (LLC) is a type of business structure that combines aspects of both a corporation and a partnership. Here are some reasons why a business owner might choose to set up their business as a LLC:

• Limited liability: Like a corporation, an LLC provides personal liability protection for its owners, known as members. This means that members are generally not personally liable for the debts and liabilities of the LLC.
• Flexible management: An LLC can be managed by its members or by a board of managers, which gives the business owner more flexibility in terms of how to organize and manage the business.
• Pass-through taxation: An LLC is considered a pass-through entity for tax purposes, which means that the business income is passed through to the members and is taxed at the individual level rather than at the business level. This can save on taxes and simplify the tax filing process.
• Ease of formation: Setting up an LLC is generally less complicated and less expensive than setting up a corporation.
• Flexibility in profit sharing: LLCs can be structured in a variety of ways with regard to profit and loss distribution among members, offering more flexibility than corporations.
• Combination of benefits: An LLC allows the business owner to enjoy the benefits of a corporation and a partnership, such as the liability protection of a corporation, and the flexibility of profit sharing in a partnership.

It’s important to note that each state has its own laws and regulations regarding LLCs, so it’s important to research and understand the requirements for your specific state. It’s always good to consult with a legal or financial advisor before making a decision.

Corporation

Why you might choose a corporation

There are several reasons why a business owner might choose to set up their business as a corporation:

• Limited liability: One of the main advantages of incorporating a business is that it limits the personal liability of the owners, known as shareholders. Shareholders are typically only liable for the amount of their investment in the corporation, rather than being held personally responsible for the corporation’s debts and liabilities.
• Separation of ownership and management: In a corporation, the shareholders own the company and elect a board of directors to manage it. This separation of ownership and management allows shareholders to be more passive in the day-to-day operations of the business, while still retaining control over major decisions.
• Easier to raise capital: Corporations can raise capital by issuing shares of stock, which can be sold to investors in exchange for cash. This can make it easier for a corporation to raise significant amounts of capital, as compared to a sole proprietorship or partnership, which may have more limited options for raising funds.
• Tax advantages: Corporations can take advantage of certain tax benefits, such as being able to deduct the cost of certain benefits provided to employees, and being able to retain earnings to invest in the business.
• Perpetual existence: A corporation has a perpetual existence, meaning that it can continue to exist even if shareholders come and go. This can make it a more stable and enduring business structure than a sole proprietorship or partnership, which may dissolve upon the death or retirement of an owner.
• Professionalism and Credibility: Incorporating a business can help to establish a sense of professionalism and credibility in the eyes of customers, suppliers, and other business partners. It can also make it easier to enter into contracts and establish relationships with other businesses.

It is important to note that setting up a business as a corporation also comes with its own set of formalities and compliance requirements, such as filing articles of incorporation, holding annual meetings, and keeping accurate records. It’s always good to consult with a legal or financial advisor before making a decision.

Non Profit

Why you might choose a non profit

A non-profit organization is a type of business that is set up to serve a specific public or social benefit, rather than to generate profits for its owners or shareholders. Here are some reasons why a business owner might choose to set up their business as a non-profit:

• Tax-exempt status: One of the main advantages of setting up a business as a non-profit is that it can be eligible for tax-exempt status under IRS section 501(c)(3). This means that the organization is exempt from paying federal income tax on the money it makes from its activities, which can help to save on expenses and put more money towards fulfilling its mission.
• Eligibility for grants: Non-profits may be eligible to apply for grants and funding from foundations, government agencies, and other sources that are not available to for-profit businesses.
• Public support: Non-profits are often able to generate public support and donations because they are seen as serving a social or public good. This can be an important source of funding for the organization.
• Ability to focus on mission: Non-profits are organized to serve a specific public or social benefit, rather than to generate profits for its owners or shareholders. This allows the organization to focus on fulfilling its mission, rather than on generating profits.
• Community involvement: Non-profits often have a strong community involvement and volunteer base, which can help to increase awareness of the organization’s mission and activities.
• Public trust: Non-profits are often able to establish a high level of public trust and credibility, which can be beneficial in establishing partnerships, collaborations and sponsorships.

It’s important to note that setting up a non-profit organization also comes with its own set of formalities and compliance requirements, such as obtaining tax-exempt status from the IRS, and adhering to strict governance and reporting requirements. It’s always good to consult with a legal or financial advisor before making a decision.