Figuring out the appropriate legal structure for a small business can be a daunting task, especially considering that each type of structure has trade-offs.
It’s crucial to take your time and choose wisely because the structure you select will affect everything from paying to taxes to assigning liability, from raising capital to sharing profits.
Here are the three most common legal structures for businesses — along with their major pros and cons:
Sole proprietorship. Of all legal structures, sole proprietorships are the cheapest and simplest. Taxes under a sole proprietorship are straightforward because you don’t need to file taxes for your business separately. Instead, you just report all of your business income and losses on your personal income tax return. But sole proprietors also lack many of the legal and financial protections of other business forms. For example, owners are personally liable for any business-related expenses or liabilities and generally still have to comply with local registration and licensing laws.
