Sole Proprietorships, General Partnerships, LLCs, and Corporations: Which One Is Best for You and Why?

Choosing a structure for your business is a highly personal decision, specific to each enterprise. In general, any type of business needs to have two considerations at the top of its list when determining what structure is best: tax implications and liability.

Below are brief descriptions of sole proprietorships, general partnerships, limited liability companies (LLCs) and corporations, along with their respective positions on tax and liability issues.

Sole proprietorships: When a business has only one owner, a sole proprietorship may be the easiest way to structure the enterprise. By default, the IRS will consider a business with one owner a sole proprietorship. The premise of a sole proprietorship is that there is no legal distinction between the business and its owner. Due to this, profits are taxed on the owner’s personal income tax return. There is not much tax benefit to this structure unless the business makes limited profits. One major drawback of a sole proprietorship is that the owner’s personal assets are not protected from having to settle business debts, including those incurred through litigation.

General partnerships: With two or more people, you may want to consider a general partnership. Like a sole proprietorship, this type of structure is easy to set up and by default, the IRS will consider a business owned by two or more people a general partnership. Although a partnership allows for pass-through taxation, which means that the business’s profits pass through the owners to their personal tax returns and are taxed at the applicable rate, the business must still file an annual report to the IRS. As with sole proprietorships, the owners are still personally liable for the business’s debts.

LLCs: Whether you are operating your business alone or have partners, an LLC offers both pass-through taxation (as described above) and limited liability for LLC owners. Under certain circumstances, the IRS permits an LLC to elect to be taxed as an S-Corporation, which could offer potential tax advantages. You must register an LLC with the state and comply with other filing and legal requirements. But satisfying these administrative hurdles means a business exists as a distinct, separate legal entity, and the owners’ personal assets are shielded from business debts.

Corporations: For companies who would like to issue stock, a C-corporation provides this opportunity. At the same time, its owners, now “shareholders,” have limited liability—though they can lose this protection if they don’t comply with certain filing requirements. Moreover, taxation may be less favorable for the owner/shareholder, in that profits are taxed once at the corporate level and then again at the individual level, resulting in “double taxation.”

Although there are other business structures available, these are the four most commonly used. Over the years, we’ve helped many people set up their business for success, and this process always begins with choosing the right structure. If you’re ready to take the next step in creating a solid structure for your business, call us at (303) 894-8948 or send us a message to get started.