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Starting a business takes dedication, persistence, and a lot of paperwork. When you’re launching a new business, it’s important to choose the right structure for your company. Your business structure affects your tax obligations, your business registration paperwork and your future flexibility. Getting it right can help you put your business on the right track for long-term success.

So, what’s the best way to choose a structure for your business? You’ll need to consider the benefits and shortcomings of each type of business and choose the one that works best for your business purpose and goals.

Different business structures to consider

Here are the most common business structures to consider when you’re launching a new company. You might also find it helpful to consult an accountant or lawyer before you make your final decision.

Sole proprietorship

A sole proprietorship is an unincorporated business with only one owner. It’s a popular choice for entrepreneurs and freelancers. Some of the main characteristics of a sole proprietorship include:

  • It’s an easy and affordable type of business that gives you total control over your company.
  • It doesn’t legally separate you from your business, so you can be held personally liable for any of your business debts.
  • It allows you to claim your business profits on your personal tax return and you’ll need to pay self-employment tax.
  • Banks may recommend Small Business Administration (SBA) loans or personal loans for sole proprietorships versus traditional business loans.

Sole proprietorships are often a smart choice for small, low-risk businesses. They’re simple to set up, with little paperwork or costs involved.

Partnership

A partnership is a simple business structure that allows two or more people to own a business together. Here are some important things to know before choosing a partnership structure for your business:

  • Each owner must contribute something – their skills, money, labor or property – to the business.
  • They’re a smart choice for businesses with multiple owners or for groups looking to try out a business idea before committing to a more formal business structure.

There are two main types of partnerships to choose from:

Limited partnerships

In limited partnerships, one owner of the business assumes more legal responsibility for the company than all other owners.

  • One general partner will take on unlimited liability, while all other partners have limited liability.
  • The partners with limited liability also usually have limited control over the business.
  • All profits from the business are claimed on personal tax returns, and the general partner pays self-employment taxes.

Limited liability partnerships

In most respects, limited liability partnerships are similar to limited partnerships, but all owners share limited liability.

  • Each partner in the company is personally protected from any business debts or lawsuits.
  • Partners can’t be held responsible for the actions of other partners.
  • All business partners are considered self-employed and must pay self-employment taxes.

Because disputes can arise when you go into business with someone, it’s a good idea to have a partnership agreement in place to outline each partner’s roles and responsibilities within the company.

“Consider the benefits and shortcomings of each business structure and choose the one that works best for your business goals.”

Limited liability corporation (LLC)

A LLC is an adaptable business structure that brings together elements of both corporations and partnerships. Here are some important aspects of LLCs:

  • LLCs protect you from personal liability related to debts and lawsuits, so your personal assets like your house and personal savings aren’t at risk.
  • They allow you to claim your business’ profits on your personal income tax.
  • You’ll be considered self-employed, so you’ll need to pay self-employment taxes.
  • Owners pay a lower tax rate than they would with a corporation.

Corporation

A corporation, or C corp, is a company or a group of people that’s considered a legal entity, separate from its owners. Here are some of the main characteristics of corporations:

  • They’re more expensive and complicated to form than other business structures, with operational requirements for record-keeping and reporting.
  • They give you the highest level of protection against personal liability.
  • Corporations pay income taxes on their profits, often at lower rates than individuals pay.
  • It’s easier to attract investment as a corporation, since you can raise money by selling shares in your company.
  • They’re often a good choice if your business is higher risk and if you might eventually take your company public or sell it.

Choosing the structure of your business is an important and exciting first step in launching a company. The right structure can help ensure you’re getting the legal coverage, tax advantages and flexibility you need to grow your business for the long term. For more guidance on the different business structures available to you, the SBA has a full overview of your options.