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What type of business structure is best?

If you've been considering starting your own business - and are ready to take the plunge - a common question that comes to mind is: what type of business form is best for your business?

Let's take a look at the most common types of business formations, and the pros and cons of each one.

Sole Proprietorship

Typically the easiest way for a person to start a business, but lacks important protections.


  • Easy set-up with very little paperwork involved
  • No special business name is required - the owner typically does business under his or her own name
  • Minimal costs
  • Simple taxation


  • Owner can be held personally liable
  • Owner is personally responsible for all debt
  • Appears less business-like than other forms


If you are forming a company with one or more additional persons, a partnership is one choice. The partners share ownership of the company, as well as the profits and losses.


  • Additional knowledge and expertise
  • Expenses are shared between partners
  • Minimal paperwork to set up
  • Simple taxation


  • Partners can be held personally liable
  • Partners are personally responsible for all debt
  • Potential for conflict between partners
  • Potential for increase in amount of taxes paid


Setting a business up as a Limited Liability Company (LLC) is still very easy to do, but provides important protections that are missing in a sole proprietorship and a partnership.


  • Members are not personally liable for the company's actions
  • Minimal paperwork to set up
  • Simple taxation


  • Potential for a court to pierce the corporate veil and impose personal liability anyway
  • Members may need to pay self-employment taxes
  • Consequences if a member leaves the company


Typically providing the highest level of protection, a corporation is its own legal entity that is owned by the shareholders.


  • Limited liability over company's actions
  • Not personally responsible for company's debts
  • Potential to acquire investors and shareholders increases


  • Increased time and cost to set up
  • Increased tax liability
  • Corporate formalities must be followed

C Corporation vs. S Corporation

The difference between these two types of corporations is in the taxation area. If a business is a C corporation, the business itself is taxed. If it's an S corporation, profits and losses pass through to the shareholders and are taxed on their personal income tax returns.

Choosing the proper business formation can be complicated. It's important to do your due diligence and take a deep dive into the different formations so that you choose the right one from the start.

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