A business structure is a way of organizing a business. The most common business structures are sole proprietorship, partnership, corporation, and limited liability company (LLC). Other structures you may hear of are partnerships with limitations. A business structure determines who owns the business and who is responsible for debts and taxes.

Incorporating your business provides greater legal protection than a sole proprietorship or partnership. Incorporating also gives you more flexibility in raising capital, hiring employees, and issuing stock to investors. But it also means that things like debts, lawsuits, or tax obligations can have a greater impact on you financially.

If you decide to incorporate your business, consider forming an LLC instead of a corporation. An LLC has the same protections as a corporation but offers more flexibility. For instance, in the profits and losses distribution to owners. For example, if you are an owner of an LLC you may be able to deduct more of your living expenses than if you were an owner of a corporation.

NOTE: If you are planning to open a home-based business, check out our home-based business information for small businesses for helpful tips on how to begin.

Sole Proprietorship

Sole proprietorships are owned by one person and are the simplest form of doing business. The owner operates the business without being subject to any outside influence or control. The owner is personally responsible for any debts or taxes owed by the business. 

The business has no existence apart from its owner’s name on legal documents such as deeds, leases, contracts, or licenses. The owner’s assets can be seized to collect any debts owed by the business (this is called “piercing the corporate veil”). 

This means that if you are sued because of something your sole proprietorship did wrong or failed to do right, your home or other personal property can be taken away from you to pay for any damages awarded against you by the court based on how much money was lost as a result of your actions or lack thereof.

Partnership

A partnership is a business structure, and is when two or more people join together to form a business with each person contributing money, property, labor, or skill and sharing in the profits and losses of the venture. If one partner contributes one type of asset (cash), and the other contributes another type of asset (land, for example), each partner will have ownership in the business based on the value of the assets that he or she contributed.

A partnership is not a separate legal entity. Instead, it is simply a business property by more than one person. In a partnership, each partner is personally liable for any debts and taxes owed by the business. This means that if you form a partnership, your assets can be taken away from you to pay for any damages awarded against you by the court based on the amount of money lost as a result of your actions or lack thereof.

Partnerships do not need to be registered with any government agency or file any legal documents with a government office. Your written agreement setting out how you will divide ownership and profits and what each partner’s responsibilities are to the partnership does not need to be notarized or filed with a government agency either.