The Big Picture

Business Structure

There are several different ways to form a business— each with its own advantages and potential drawbacks.

This guide will simplify the options and get you on your way.

The Basics

All businesses fall into one of two categories: incorporated and unincorporated.

There are two main implications for the choice of whether or not to incorporate:

Some questions to ask when considering the right business structure:

  • Is this a business or a hobby?

  • Are you concerned about being personally liable for your business debts and other obligations?

  • Are you interested in a flexible tax structure?

  • Are you willing to put the time, effort, and money into incorporating and ongoing corporate obligations?

Unincorporated

Unincorporated businesses are easy to start and manage and are the right choice for simple businesses that aren’t worried about incurring major debts, being sued or taking money from outside investors. There are no distinctions in unincorporated businesses between the company and its owners.

  • If the company owes money, they owe money.
  • If the company gets sued, they get sued.
  • If the owners die, the company dies.

The advantage is that unincorporated businesses have “pass through” tax structures and all taxes are paid by owners as income.

There are two main kinds of unincorporated businesses:

  • A sole proprietorship is a company owned by one person.

  • A general partnership is a company owned by two or more people.

In 2008, 71.5% of businesses filed taxes as sole proprietors and 10% filed taxes as partnerships.

Unincorporated

Sole Proprietorships

Forming and operating a sole proprietorship

If you are the only owner of your business, you’re automatically a sole proprietor simply by conducting business.

Although there aren’t complicated start-up requirements for establishing a sole proprietorship, there may be requirements for registration and business licenses or permits you’ll need to make your business legit. You can see a list of federal licensing requirements here and links to state requirements here. Be sure to also check with your city government for any zoning, permitting or license requirements.

As a sole proprietor you can either do business under your own name or you can register a trade name or DBA (“doing business as”) with your state. Consult your secretary of state’s website for more information.

When it comes to taxes, your business earnings or losses will be reported directly on your personal income tax return. You will want to submit quarterly estimated tax payments, track and report deductions and apply for all available small business tax credits. Check if you need to pay self-employment tax or estimated taxes.

If you have employees, you’ll need to comply with state and federal employer requirements. See our guide Hiring People Basics for more information and our Legal Services Buyer’s Guide for information on legal services.

For a great overview, check out NOLO 50 State guide to establishing a sole proprietorship.

Partnerships

Forming and operating a partnership

Forming a partnership will take a little more work than becoming a sole proprietor. The biggest difference is that you will write and sign a partnership agreement that lays out your plans for the company including ownership percentages, responsibilities of each partner and what happens in various contingent situations. For more about partnerships and partnership agreements, check out our Business Partnership Basics Guide.

You will need to register a business name that is unique to you. This can either be the last names of the partners or a trade name. Consult your secretary of state’s website for more information.

From there you will want to investigate registration and business licenses or permits needed to make your business legitimate. You can see a list of federal licensing requirements here and links to state requirements here. Be sure to also check with your city government for any zoning, permitting or license requirements.

When it comes to taxes, your business earnings or losses will be reported directly on your personal income tax return. That said, you will still need to file the partnership’s income (Form IRS 1065) as well as the details on how income was divided between partners (Schedule K-1).

If you have employees, you will need to comply with state and federal employer requirements. See our guide Hiring People Basics for more information and our |Legal Services Buyer’s Guide for information on legal services.

Incorporated

When a business is incorporated it becomes a separate legal entity called a corporation.

The owners of a corporation have limited liability, which means they get some protection from debts or legal penalties incurred by the corporation.

Corporations have very flexible ownership structures, including the ability to issue shares or stocks. This means there are many ways to finance a corporation.

Because corporations are separate legal entities, they pay taxes on profits they make( IRS 1120). This can lead to “double taxation” with taxes paid both by the owners and the corporation. S-Corporations are the exception to this—they file a form ( IRS 2553) electing to be taxed as a partnership.

Check out BizFilings’ great guide on corporate taxes.

Keep in mind that it takes more time and effort to manage a corporation, including governance, accounting and reporting requirements. Also know: corporations can be for-profit or non-profit.

Incorporated

Corporations

Forming and operating a corporation

The requirements for forming a corporation will vary depending on state law. You can find a link to your secretary of state’s website here. Keep in mind that you don’t need to live in the state where you incorporate. Keep in mind that you don’t need to live in the state where you incorporate

While it is possible to file the incorporation paperwork on your own, most people work with an attorney or online service. Guide to Legal Services.

Managing a corporation is a bit more work-intensive than other business structures. For one thing, every corporation maintains a set of key documents including articles of incorporation, company bylaws, stock certificates or grants, a list of shareholders (AKA a cap table) and any shareholder or board resolutions.

In addition to having business managers, corporations have an additional layer of oversight called a board of directors. The officers of the company (CEO, president, etc) take care of the day-today management of the business and report to the board. Board members do not have to be shareholders, although they represent the interests of shareholders. The company’s bylaws lay out the rules of the corporation.

Every company has a registered agent to receive any legal and tax correspondence.

As with unincorporated businesses, you will need to name your company, register the business with state and city, acquire proper permits, licenses and zoning and file taxes as a corporation. If you are an employer, you must meet the legal and record keeping requirements.

S-corporation

S-corporations are exactly like corporations in most regards. The key differences are that they are taxed as a partnerships, are limited to 100 shareholders, and can’t issue some kinds of stock.

Limited Liability Companies

Limited liability companies, or LLCs, are a hybrid between a corporation and an unincorporated company.

They are like sole proprietorships or partnerships in that they don’t pay taxes separate from their owners but have a “pass through” tax structure.

But like corporations, LLC owners have limited liability for debts and legal penalties incurred by business. However, they have fewer obligations than corporations when it comes to governance, administration and recordkeeping.

Forming an LLC

Because LLCs are a bit more straightforward, it’s possible to file the articles of organization yourself by submitting forms found in your secretary of state’s website. Otherwise, see our Legal Services Buyer’s Guide for ideas on hiring an attorney. If you have multiple owners, you will need an o operating agreement that lays out terms for owners (which in the case of an LLC are called members).

As with unincorporated businesses, you will need to name your company, register the business with state and city, acquire proper permits, licenses and zoning and file taxes as a corporation. If you are an employer, you must meet the legal and record keeping requirements.

Resources

While it is possible to register a business on your own, having a lawyer’s help is recommended for all but the most basics set-ups. Check out our Legal Services Buyer’s Guide for some ideas on hiring an attorney.

Once you have set-up your business, having Employer Identification Number, having an EIN can be useful.

Your legal name and the name that you “do business as” (DBA) do not have to be the same.