Choosing the Right Business Structure: What Every Small Business Owner Needs to Know
Starting a new business is exciting—but before you choose a name, build a logo, or launch a website, there's one foundational decision that can affect everything that follows: choosing the proper business structure.
Your business structure determines how your company is taxed, who is liable if something goes wrong, how profits are distributed, and even how you raise capital. While it's possible to restructure later, changing your entity type down the road can be costly, complicated, or—in some cases—not feasible.
This guide walks you through the most common business structures when to consider each, and real-world examples to help you make the best choice for your goals.
Common Business Structures (and What They Mean)
Sole Proprietorship
A sole proprietorship is the simplest form of business. It's typically used by solo entrepreneurs who want minimal startup paperwork. The company and owner are legally the same, meaning you're personally responsible for all debts, liabilities, and obligations.
Best for: Freelancers, consultants, and side hustlers just getting started.
Source: https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships
Partnership
Two or more individuals own a partnership. There are general partnerships and limited partnerships, each with varying levels of liability and control. All partners share profits—and typically, liability—unless the arrangement is structured otherwise.
Best for: Co-owned businesses where trust and collaboration are key.
Source: https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
LLC (Limited Liability Company)
An LLC offers liability protection similar to that of a corporation but is taxed like a sole proprietorship or partnership. It's flexible and popular among small business owners due to its simplicity in maintaining and protecting personal assets.
Best for: Small businesses seeking liability protection without the complexity of a corporation.
Source: https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc.
S Corporation (S Corp)
An S Corp avoids double taxation by passing income, losses, deductions, and credits directly to shareholders. Owners must pay themselves a "reasonable salary," which is subject to payroll taxes while remaining profits can be distributed as dividends.
Best for: Growing businesses that want tax savings and liability protection.
Source: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
C Corporation (C Corp)
A C Corp is a separate legal entity owned by shareholders. It's taxed on profits, and shareholders are also taxed on dividends—known as "double taxation." However, C Corps are ideal for raising capital, issuing stock, and reinvesting profits.
Best for: Startups planning to scale, seek investment, or go public.
Source: https://www.irs.gov/businesses/small-businesses-self-employed/c-corporations
Real-World Examples
Sole Proprietorship: Emma, a freelance photographer, files under her name. She loves the ease but knows she's personally liable if a contract goes sideways.
LLC: Adam owns a landscaping company. Creating an LLC helps protect his house and car in the event his business faces a lawsuit.
S Corporation: Jenna and Mike run a design agency. They chose S Corp status to pay themselves salaries and take tax-efficient distributions.
C Corporation: A local tech startup has established itself as a C Corporation to issue stock and attract venture capital investments.
Key Considerations Before You Choose
Ask yourself:
Do you require security for personal assets?
Will you have partners, investors, or employees?
Are you pursuing tax simplicity or long-term growth potential?
Will you reinvest profits or pay yourself from earnings?
Each structure has trade-offs. For example, an LLC is straightforward to manage, but it might not be ideal if you're looking to expand outside of capital. A C Corp offers flexibility for growth but comes with more paperwork and tax complexity.
Final Thoughts
There's no one-size-fits-all answer. The most suitable structure depends on your business goals, risk tolerance, and long-term goals. Making the proper choice early on can save you legal headaches, tax surprises, and wasted time later.
If you're unsure, it's worth scheduling a meeting with the Accounting Solutions team; we can evaluate your unique situation and help you get it right from the start.
Pro Tip: Your business structure not only affects taxes but also impacts how people view your brand. Choose the option that aligns with your ambitions.