Guide to Choosing a Legal Structure for Your Business

  • Your business’s legal structure determines your tax rates, management and paperwork requirements, fundraising abilities, and more.
  • Sole proprietorships and partnerships are relatively easy to start, but they lack liability protection. 
  • Corporations may take more work to start, but they offer liability protection and, in some cases, more favorable tax rates.
  • This article is for business owners looking to learn more about the different small business legal structures.

Your business’s legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board. [Related article: What to Do if Your Business Gets Sued]

We’ll explore business legal structures and how to choose the right structure for your organization. 

A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can have liability ramifications.

Choosing the right business structure from the start is among the most crucial decisions you can make. Here are some factors to consider:

  • Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
  • Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does
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