One of the most visited articles on the SmallBusiness.com WIKI is about selecting a business structure when starting a business. While there is a lot of helpful information about determining in what legal structure your new business should be organized on our WIKI and across the web, this is one of those decisions you should make with the help of a trusted business advisor. Why? Your CPA and lawyer can help you determine the best structure for your unique situation, requirements or goals. While there are several online companies that specialize in helping new businesses structure themselves, you should still consider consulting your trusted advisors first. Even if you end up using one of the online services, it is worth getting a second (or more) opinion.

Are you doing research on how to start a small business? Here’s a good place to start: How to Start a Small Business | An Overview of SmallBusiness.com Resources

Comparison of some ways business structures differ

More information and explanations about business structure options

Many factors must be considered when choosing the best form of business ownership or structure. The choice you make can have an impact on multiple aspects of your business, including taxes, liability and ownership succession.

There are four primary ways to legally organize a business: a sole proprietorship, a partnership, a limited liability company and a corporation. When organizing a new business, it is important to take the time necessary to review the pros and cons of each structure.

Sole proprietorship

This is considered the easiest and least costly way of starting a business. A sole proprietorship can be formed by finding a location and opening the door for business. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.

Partnership

There are several types of partnerships. The two most common types are general partnerships and limited partnerships. A general partnership can be formed simply by an oral agreement between two or more persons, but a legal partnership agreement drawn up by an attorney is highly recommended. Profit, loss and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return.

Limited liability company

A limited liability company (LLC) is a structure that gives its owners limited liability for the entity’s debts and obligations, similar to the status of shareholders in a corporation, and its income and losses are normally passed through to the owners as if it were a partnership. An LLC is a statutory creation. That is, unlike general partnerships which are developed under common law, an LLC is created by filing a document (usually called Articles of Organization) with an officer designated by state law.

Corporation

A business may incorporate without an attorney, but legal advice is highly recommended. A corporation is usually the most complex and most expensive way to organize a business. Control depends on stock ownership and is exercised through regular board of directors’ meetings and annual stockholders’ meetings. Records must be kept to document decisions made by the board of directors. Small, closely held corporations can operate more informally, but record-keeping cannot be eliminated entirely. Officers of a corporation can be liable to stockholders for improper actions. Liability is generally limited to stock ownership, except where fraud is involved. You may want to incorporate as a “C” corporation or “S” corporation.