How to Choose the Legal Form of a Business

When organizing a new business, one can choose to operate as a sole proprietor, a partnership, a corporation, or as a limited liability company (LLC). Which is best for your business?

To decide on the right the legal form for your business:

  1. Decide whether you are running this business by yourself or with others involved
  2. If by yourself, you will be running a sole proprietorship.
  3. Is it more important to you to have a simple business and tax structure or less personal liability for debts and corporate judgements?
  4. If you want a simple business and tax structure with more than one person, choose a partnership.
  5. If you want to limit your personal liability for debts, choose to incorporate.
  6. If you are incorporating, would you trade more flexibility for greater confusion in the tax laws?
  7. An LLC (which needs to be set up by a lawyer) is more flexible in management and taxation, but state and federal laws may conflict on how to manage them.

Tips:

  1. A sole proprietorship can include your spouse.
  2. A corporation and an LLC are more expensive to create than a partnership or sole proprietorship.
  3. Many states allow an LLC to be formed by one person.