4 Most Common Business Legal Structures (and How to Choose One)

By  //  March 30, 2023

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When you start your own business, you have many decisions to make. One of the most important is the legal business structure your business takes on.

Each business structure has its own advantages and disadvantages. Many of these traits relate to the tax implications and liability protections each business structure provides.

Before determining which business structure is best for your organization, it’s best to understand each one. Here is a closer look at the four most popular structures – sole proprietorship, partnership, limited liability company (LLC) and corporation.

■ Sole Proprietorship

A sole proprietorship is the simplest and one of the most common business structures. As the name implies, it is owned by a single individual, who is fully responsible for the business, including its profits, debts and liabilities.

A sole proprietorship is often used by small, home-based businesses that don’t have a physical storefront. It is considered an unincorporated business type in that there is no filing or paperwork necessary to create it.


  • Simple Taxes. The owner and their business are indistinguishable from a tax perspective. The owner files taxes for the business on their personal federal and state returns. However, owners can still take advantage of several tax benefits, including taking deductions for certain business expenses.
  • Easy to Launch. Since there is no legal structure, the owner can create the business with little paperwork and no need to have a board or partners. If the owner is the only employee of the business, there’s no need to file employment taxes for others.
  • Few Start-Up Costs. With other business structures, there are filing fees and other expenses related to launching the business. With a sole proprietorship, there many be local or state licensing fees and business taxes to pay, but little else.
  • Easy Exit. Ending a sole proprietorship is as simple as starting one. Dissolving the business requires no formal documentation. If the owner wishes to fold the operation, it’s a simple process.


  • Liability Risk. With no legal distinction between the owner and the business, the owner is liable for any judgements against the company. The owner’s personal assets could be at risk, which can be a major consequence if the business is sued or accrues massive debts. Other business types protect the owners’ personal assets.
  • Legal Vulnerability. If someone is going to sue a sole proprietorship, they are going to sue the business owner. Vendors, landlords, employees, customers and suppliers can all sue a sole proprietor. The owner will be responsible for any judgments against the business, which can threaten the business’ ongoing viability.
  • Self-Employment Taxes. When you work for an employer, that employer is responsible for a portion of the Social Security taxes. In a sole proprietorship, the business – meaning the owner – must pay all Social Security and Medicare taxes.
  • Financing Difficulties. It can be difficult to secure funding for sole proprietorships. Lenders see the business structure as risky and owners usually do not have large nest eggs to rely on as collateral or as a cushion if the economy softens. Owners usually end up having to finance their business themselves.

■ Partnership

Partnerships are businesses with two or more owners. Each of the partners contributes funding, skills, property, labor or other assets. Profits are shared among the partners/owners. It’s an ideal structure for someone who wants to go into business with a family member, friend or business associate.

In a partnership, partners share in profits and losses and make decisions together.

There are two types of partnerships:

  • General partnerships where the business is evenly split into documented percentages
  • Limited partnerships where control and liability lie with a specific group of partners

Creating partnerships often require the use of an attorney to draw up legal documents that outline the structure, roles, conflict resolution, dissolution guidelines and responsibilities of each partner. Some states require a “doing business as” documentation or a certificate formalizing the partnership terms and partners.


  • Taxation Benefits. A general partnership will file a federal tax Form 1065 but typically does not pay income tax. Partners report their shares of income or losses on individual tax returns.
  • Shared Responsibility. With a partnership, no owner bears the full responsibility for business success. Each owner can achieve better work/life balance and has access to new perspectives, ideas, resources and contacts than if running a business solo.
  • Capital Opportunities. A partnership can also lead to easier financing and access to capital than a sole proprietorship. And more partners means that those partners can be potential investors in the business.
  • Simple Launch and Management. You can establish a business partnership relatively easily and will have fewer tax forms to complete compared to other structures.


  • Personal Liability. The business partnership is not separated from the individual owners. That means owners incur personal risk for the partnership and the partners’ actions.
  • Potential Higher Tax Burden. Owners must pay self-employment taxes, which can result in a higher tax burden than in other business structures.
  • Conflicts with Partners. Partners may not always agree on a course of action. Over time, conflicts among owners can derail the business.

■ Limited Liability Company

An LLC offers up some of the most considerable advantages of other business structures. While an LLC is a type of corporation, there are unique features that make it among the most popular business types.

An LLC is a hybrid business structure. It allows owners, shareholders and partners to limit their personal risk while taking advantage of tax benefits.

Owners, called members, are protected from personal liability for debt unless negligence or wrongful conduct that causes injury can be proven. LLCs were created to give owners the liability protections that corporations have while allowing earnings and losses to pass through to personal tax returns. The LLC does not file taxes as a legal entity.

And the most important part, setting up an LLC is a relatively simple process to follow. State filing requirements vary but include a nominal filing fee and basic documentation about the LLC and its management.


  • Simpler Corporate Requirements. Corporations require regular meetings of the board and shareholders, written minutes and annual reports. Members and managers do not have to follow those requirements.
  • Lack of Ownership Restrictions. There are no limits on the number of members of an LLC.
  • Accounting Flexibility. With an LLC, businesses can use the cash method of accounting, which allows income to be earned once it’s received.
  • Tax Flexibility. The tax advantages are an important benefit of an LLC. LLCs act like a sole proprietorship with profits and losses passed through to owners. LLC owners are not required to pay unemployment insurance taxes on their own salaries. LLCs also can choose to be taxed as either a partnership or a corporation. Members can also deduct operating losses against their own income as allowed by law.


  • Tax Implications. LLC owners may pay more in taxes than corporation owners. Salaries are subject to self-employment taxes. LLC members need to file additional forms for state and federal taxes and may need to pay payroll taxes, too.
  • Profits Immediately Recognized. Unlike with a C-corporation, with an LLC’s profits are immediately applied to the owners’ income tax liability.
  • Limits on Choice. Each state has different rules about what business types are eligible for the LLC designation. Banks and insurance companies are two of the most common businesses that are often ineligible to structure as an LLC.

■ Corporations

Corporations are their own legal entity, with rights and privileges of its own, separate from those of its owners. A corporation can sue, be sued, and buy and sell property. They also can sell ownership stakes in the entity through stock holdings.

The corporation holds all the risks and liability of the business.

There are multiple types of corporations, ranging from for-profit to nonprofit entities. Forming a corporation is a complex process that requires filings at the state and federal level.

Corporations must have boards of directors, hold annual meetings of the board and shareholders, and file reports. Its work is subject to regulators and public scrutiny.

Here is a closer look at the two most common corporation types:

  • C corporation. A C corporation is a separate tax entity and files its own tax return at the federal and state levels. The corporation is owned by its shareholders. C corps are subject to double taxation. The corporation itself pays corporate income tax and the shareholders pay personal taxes on dividends the corporation issues.
  • S corporation. Designed primarily for small businesses, the S corporation avoids double taxation in the same way as sole proprietorships and partnerships. While S corps need to file an informational federal tax return, no income tax is paid. Profits and losses are passed through to the owners, who pay individual income tax.


  • Capital Benefits. Corporations can raise major amounts of capital by selling shares. It’s an attractive option that allows for individuals to share the risk and gain if the business succeeds.
  • Less Risk. Liability is a major reason to form a corporation. The individual owners, e.g., the shareholders, are not personally liable and their personal property is not at risk. If a customer, for example, sues a retail chain, it is the chain that is liable not the shareholders.


  • Some Personal Liability. While the majority of risk is incurred by the corporation itself, individuals can still be held liable. For example, if officers did not maintain records properly or intentionally deceive investors, then those shareholders can be sued or charged as individuals.
  • Complexity. Corporations are more complex, with more leadership layers, filing obligations and maintenance requirements.

Determining the right business structure for your business depends on the business type, risk tolerance and tax considerations.