Structuring your company will have a significant impact on all sorts of money matters including your taxes, financing, compensation, and insurance. And don’t forget your exposure to lawsuits. Therefore, a business owner’s first consideration is usually: What type of company do I want to create?
There are generally four questions you'll need to answer:
- What kind of liability protection do I need?
- How do I want to pay taxes?
- What are my financing needs and options?
- And, how much administrative complexity can I deal with?
Of course there are other issues too. But when you’ve addressed these four, you should be fairly close to an answer. Here’s a guide to help you understand the pluses and minuses of each type of structure.
Keep in mind that regulations for starting a company differ from state to state. See a list of links to each state’s agency for registering new businesses.
A sole proprietorship is the simplest business structure, owned by an individual or a married couple.
A general partnership is similar to a sole proprietorship, except there are two or more owners of the business (who aren’t a married couple).
A Limited Liability Company or LLC is a hybrid business entity that shields owners’ personal assets from business liability, but allows the returns they earn to be taxed once, as personal income
A limited partnership is a complex business structure with two classes of partners: limited (LP) and general (GP).
A C Corporation is a legal entity, with a charter granted by the state in which it is headquartered. It can sell shares of stock to raise money, and shareholders become owners with an interest based on the size of their investments.
An S corporation is structured like a traditional C corporation, except that a special classification from the IRS exempts earnings from double taxation.
Professional Corporations (PCs), Professional LLCs, and Limited Liability Partnerships (LLPs) are versions of basic business structures that provide some liability protection for certain types of professional firms, such as medical and legal practices, which may be exposed to enhanced liability risk.