Deciding the Best Legal Structure for your Business

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Sole Proprietorships

A sole proprietorship is the most basic business structure. There is one sole owner of the business and once business operations begin, the entity exists. here are no papers to file with the Secretary of State to establish the existence of a sole proprietorship.

The individual owner and the sole proprietorship are the same legal entity. This means business profit taxes are treated as income on your personal taxes, and if the business has any liabilities (like a court judgment or a past due debt), the owner may be personally liable for those debts.

General Partnerships

A general partnership is similar to a sole proprietorship. A partnership has two or more owners. The partnership begins when you start a business with one or more people. Each partner reports their share of the business profits on their personal taxes as income and each partner may be held personally liable for any debts, claims, or other liabilities of the business.

Limited Partnerships

A limited partnership is more complicated to set up. Limited partnerships are similar to general partnerships except there are two categories of partners: general partners (GPs) and limited partners (LPs). The GPs are in the same legal position as partners in a conventional firm, i.e., they have management control, share the profits of the firm in predefined proportions and have joint and several liability for the debts of the partnership.

While the general partners are personally liable for any debts, the limited partners are not personally liable for any of the limited partnerships liabilities. The limited partners share in the business profits at a predefined proportion but are generally not included in many of the day to day operations.

Limited Liability Company (LLC)

A limited liability company is a hybrid legal structure that provides protection from liability to the owners – known as 'members', yet is taxed differently than a corporation. Unlike a corporation, LLC's are not separate tax entities. Instead, all profits and losses are "passed through" the business to each member of the LLC. The owners of the LLC must pay personal income taxes on their share of profits and declare all profits and losses of their share in their federal income return.

The LLC structure may be helpful if owners have personal assets they want to shield from any potential liability associated with the business, but prefer the tax structure of an LLC to that of a corporation. Like corporations, LLC's are formed by registering the entity in their "domestic" state. An LLC is often required to assign a registered agent as part of this process. Most states require annual reports to be filed to uphold this registration.

Nonprofit Corporations

A nonprofit corporation is a corporation that is formed with the intent to carry out a charitable purpose. A nonprofit can solicit charitable donations from the public and apply for government grants. One of the benefits to a nonprofit corporation is that funds raised by the nonprofit are not taxed by either the federal or state governments.


A corporation is an independent legal and tax entity owned by shareholders. The owners of a corporation are generally not held personally liable for the actions of the corporation. Corporations are similar to limited liability companies in the protection they provide to an owner's personal assets. They are different in the way they are taxed. A corporation pays taxes on the company's profits and the owners of the corporation only pay income taxes on money drawn from the corporation such as salary, dividends, or bonuses. A corporation also has the option of going 'public' and selling shares of ownership through public stock offerings.

Corporations are formed by registering the entity in their "domestic" state. This process is generally overseen by the Secretary of State or Department of State. A corporation is often required to assign a registered agent as part of this process. Most states require annual reports to be filed to uphold this registration.

Please consult an attorney if you are unsure which business entity best fits your needs.

LicenseLogix is not a law firm and neither LicenseLogix nor any of its employees provide legal services or legal advice. The information provided within this site is not legal advice, but general information on business formation and licensing issues commonly encountered. LicenseLogix can only provide services at your specific direction. Please review our Terms of Use and Privacy Policy for complete policies.

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