How to Choose the Best Legal Structure for Your Business

An LLC is the process of choosing the best legal structure for your start-up venture, which is one of the most important decisions you'll make as an entrepreneur. It's important to understand the pros and cons of each legal business entity before making your final decision. This choice impacts everything from taxation to liability to management structure to company control.

Identify financial goals for your business and for you as an individual, then determine which business structure gives you the most benefits that support these goals. Consider setup costs, the level of control you prefer, distribution of profits and losses, and the eventual dissolution procedures.

Sole Proprietorship

A sole proprietorship, the most basic type of business entity, is owned by just one person. This category includes the single-member limited liability company (LLC). With this business structure, the owner is responsible for all the company's debts and profits. A single-member LLC is an excellent choice for the sole proprietor who wants complete control over how the business operates. However, with a sole proprietorship, your personal and professional assets are not separated unless you establish an LLC, which leaves you open to liability for business obligations and debts.

Partnership

A partnership is a business owned by two or more individuals, corporations, or trusts. Depending on the laws of your state, you may be able to form a general, limited, or limited liability partnership. In a general partnership, the owners share all income, debt, and liability as well as responsibility. 

In a limited partnership, one or more general partners control the operations while the limited partners provide funding and receive a percentage of the profit accordingly. Limited partners are considered investors and do not share in liability for business obligations and debts. A limited partnership also allows for the distribution of dividends to shareholders, which cannot be done in a standard corporation.

General partners can also create a limited liability partnership (LLP) in which all the owners are shielded from personal liability for financial obligations of the other owners or employees or of the business itself. This structure is similar to a limited liability company (LLC) but must abide by partnership rules. 

A partnership is ideal for family members or friends who are going into business together, although it's important to note that you may be held responsible for your business partner's actions unless you create an LLP.

Limited Liability Company (LLC)

Business owners can establish an LLC in any state by filing Articles of Organization. This business structure combines the limited personal liability of a corporation with the tax benefits and flexible management of a partnership. An LLC can be managed by a managing member, by several members, or by an outside manager.

An LLC is subject to pass-through taxation, which means business profits and losses are reported directly on each member's individual income tax return. Members are not personally responsible for business debts and judgments as long as they have not acted in an irresponsible, unethical, or illegal manner. 

If you are a doctor or an attorney, you can create an LLC to provide your professional services. Some LLCs are designed to take advantage of commerce laws between states. Some states offer a new business structure called a Series LLC. The Series LLC allows you to create many companies with separate liability under one parent LLC.

You should consider forming an LLC if:

  • You expect that your business will run at a loss for two or more years.
  • You want to have flexibility in your accounting methods.
  • You own a real estate company.
  • You want a flexible management structure.
  • You want to avoid formal requirements such as a board of directors and annual meetings. 
  • You want flexibility in how owners share profits.

Corporation

C corporation is a legal business entity separate from its owner. A corporation can maintain its own bank accounts, sign legal contracts, establish a credit history, and purchase property and other assets. A corporation is owned by shareholders, some of whom may also act as executives or employees.

If you need help with deciding what type of business is right for you, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.