Choosing a business structure is one of the first real decisions you make as a business owner, and it affects your taxes, your personal liability, and how much paperwork you deal with every year. It is also a decision a lot of people make by default, by Googling at midnight, or because a friend did it that way.
Here is a plain-English overview of the most common options. This is general information, not legal or tax advice. Talk with an accountant or attorney about your specific situation, because state rules and your own finances matter a lot here.
Sole proprietorship
If you start doing business on your own without forming a separate entity, you are generally a sole proprietor by default. It is the simplest and cheapest option. Business income goes on your personal tax return, and there are very few formalities.
The trade-off: there is no legal separation between you and the business. If the business owes money or gets sued, your personal assets can be at risk. It can work well for low-risk businesses that are just getting started, but many owners outgrow it.
Limited liability company (LLC)
An LLC is a separate legal entity that can help protect your personal assets from business debts and claims. It is popular with small businesses because it offers that protection with relatively light upkeep. By default, a single-member LLC is usually taxed like a sole proprietorship, though LLCs can elect different tax treatment.
Things to know: there are state filing fees and, in many states, annual fees or reports. And the liability protection works best when you treat the LLC as a real business: separate bank account, proper records, and contracts signed in the business’s name.
S corporation election
An S corp is a tax election, not a separate type of business. An LLC or corporation can elect S corp status. Once a business is earning a certain level of profit, this election can reduce some self-employment taxes, because owners pay themselves a reasonable salary and may take additional profits as distributions. It also adds payroll and accounting requirements, so it is worth running the numbers with an accountant before you elect it.
C corporation
A C corp is a more formal structure with shareholders, a board, and its own corporate tax return. It is often the expected structure for businesses planning to raise venture capital or issue stock to investors. For most small service businesses, it adds complexity without much benefit, but for high-growth startups it can be the right choice.
Partnership
If two or more people own a business together without forming another entity, it is generally a partnership. Many co-owners form a multi-member LLC instead. Either way, get a written agreement that covers ownership percentages, decision-making, money, responsibilities, and what happens if someone wants out. Friendships and businesses both last longer when the hard questions are answered early.
How to decide
A few questions help narrow it down:
- How much risk does my work involve, and how much personal protection do I want?
- How much profit do I expect, and would a tax election make a meaningful difference?
- Am I planning to bring in partners or investors?
- How much paperwork and cost am I willing to manage each year?
You can also change structures as your business grows. Plenty of owners start as a sole proprietor or simple LLC and revisit the decision when revenue increases.
Get good advice
This is one of the places where an hour with a professional pays for itself. If you need a recommendation for an accountant or attorney, ask in the WEN Facebook group. Other members are usually happy to share who they work with.
For the rest of the startup checklist, see Legal Essentials for Starting a Small Business and 10 Steps to Take Before Starting Your Own Business.
