Selecting the right business structure is an important step that will determine legal, financial, and operational aspects of your small business. This decision, though weighty, doesn’t have to be a permanent one. As your company grows and evolves, you might shift to a different structure. For now, you need to determine which structure is the best fit for your business. Below we discuss your options for choosing a business structure.

Sole Proprietorship

This is the simplest and most common business structure for small businesses. With this setup you are the sole owner and operator of your business, and there is no legal distinction between you and your company. A sole proprietorship offers complete control and minimal paperwork, but you are personally responsible for all debts and liabilities. This is a good option for freelancers, consultants, and independent contractors, as well as very small, low-risk businesses.

Partnership

If your business involves one or more partners, a partnership structure might be the best option. Partnerships can be general (where all partners share profits and losses equally) or limited (where some partners have limited liability). It’s important to create a comprehensive agreement among partners—and most states require them anyway. This agreement should outline each partner’s responsibilities and profit-sharing, as well as procedures to resolve disputes among partners.

Limited Liability Company (LLC)

An LLC combines the flexibility of a sole proprietorship or partnership with limited liability protection similar to that of a corporation. In an LLC, your personal assets are generally protected from business liabilities. Because this structure offers legal protection without the administrative complexities of a corporation, it’s a popular choice for small businesses.

Corporation

A corporation is an entirely separate entity from its owners, so it provides the highest level of personal liability protection. This structure requires more paperwork, formalities, and taxation complexities.

There are two types of corporations: C corporations and S corporations. A C corporation is the default structure for corporations, and IRS forms must be filed to convert it to an S corporation (there also might be separate state forms to complete). C corporations pay corporate income tax on their profits, and shareholders may also face taxes on dividends and capital gains. S corporations pass their income and losses through to shareholders, who report them on their individual tax returns, avoiding the double taxation that C corporations are subject to. However, a C corporation offers more flexibility in terms of ownership and shareholder types. They can include non-U.S. residents, other corporations, and various entities.

Now that we’ve touched on the common business structures, here are some factors to consider when choosing the right one for your small business:

• Liability Protection: Evaluate how much personal liability protection you need. If you want to shield your personal assets from business debts and lawsuits, consider and LLC or corporation.
• Tax Implications: Different structures have different tax implications. Sole proprietorships, partnerships, and S corporations often pass income through to the owners’ personal tax returns, while C corporations are subject to double taxation.
• Ownership and Control: Consider how much control and ownership you want to retain. Sole proprietorships and partnerships offer full control but may limit your ability to raise capital. Corporations and LLCs allow for multiple owners and investor but involve more complex governance.
• Future Growth: Think about your long-term goals. If you anticipate rapid growth or plan to take your business public, a corporation may be the best option. LLCs are more flexible and can also accommodate growth but may have limitations in attracting investors.
• Compliance and Administration: Take into account the administrative requirements and costs associated with each structure. Corporations typically have more paperwork and reporting obligations than sole proprietorships or LLCs.

Finally, when deciding on a business structure, it’s best to consult legal and financial professionals who specialize in small business matters. They can help you understand the legal, financial, and operational implications of your options, and advise you on the best structure for your small business.