With very few exceptions, businesses cannot lawfully operate within a given state until they’ve been formally registered. If you’re launching a new business, you’ll need to commit to a business formation structure before registering to operate in any state in the U.S.
Choosing the best business structure for your company involves weighing the potential benefits and downsides associated with each option. The business formation process is a consequential undertaking, as your decision will ultimately affect how your business is taxed, its managerial structure and a host of other legal and financial issues. As a result, you’ll want to consider your options carefully before committing to one over the others.
Sole proprietorships and partnerships
If you’ve been operating as an independent contractor, and you don’t have any other formal business structure in place, you’ve been operating a sole proprietorship by default. A sole proprietorship is owned by a single individual and its profits and losses are reported on their individual tax return. Most sole proprietorships don’t need to submit any formal reporting to the state. While this structure benefits from maximum flexibility and control in re: the owner’s approach, it doesn’t benefit from personal liability protection.
Partnerships generally operate just like sole proprietorships do, except they are owned by more than one individual and/or entity. Hybrid partnership structures may offer some personal liability protection but not much.
These companies are taxed as distinct legal entities, are owned by shareholders and are managed by a board of directors. They are required to report business information to the state at regular intervals and are highly regulated. Shareholders benefit from the maximum degree of personal liability protection afforded by law.
Limited liability companies
LLCs offer significant personal liability protection, may be taxed as corporations or on a personal return and are subject to modest reporting requirements. They also benefit from a flexible management structure. They are more challenging to form than sole proprietorships and partnerships but less challenging to form than corporations.
There is no “one size fits all” formation structure that meets the needs of every business. Choose your company’s structure based on which will best serve your vision and your company’s unique brand.