Is setting up an LLC the best option for your small business?

You’ve made a big decision: You’re going to launch your own business. It can be both exciting and daunting to become your own boss, but you’re not alone. In recent years, there has been a substantial increase in new business starts, with millions of people going out on their own to open stores and restaurants, launch products, or provide professional services^.1
 

One of the first steps you’ll need to take is deciding what type of legal business structure you’ll choose for your new venture. This decision will impact what you pay in taxes, how you can raise money, and your personal liability exposure. For some types of small businesses, establishing a limited liability company—or LLC—may be the best option. You should consult with qualified legal counsel and tax advisors early in the process to help you determine the best legal entity for your situation.

Key questions to help determine the best structure for your business

Answering a few key questions in consultation with your legal counsel and tax advisors can help you refine plans for your business—and determine what types of structures might be appropriate:
 

• Who will own your business? — If you’ll own the entire business yourself — or with your spouse — you can choose a simple business structure that includes little or no paperwork. If you plan to own your business with others, you may have to choose a more complex structure that requires additional paperwork.
  
  
• Do you have plans to grow significantly with the support of investors? — If your business will have investors or you plan to issue stock, you’ll want to consider corporation options.
  
  
• Do I need a business structure that provides liability protection for my personal assets? — If you plan on having customers or contractors visit your place of business — even if it’s your home — or if your products or services could cause injury or financial loss, your business could face liability claims. Some business structures—including LLCs and corporations—help shield your personal assets from claims against your business.
  
  
• What is your appetite for paperwork and administrative tasks, including filing tax forms? — Some business entities — such as sole proprietorships and LLCs — are easier to set up and require little paperwork from year to year. Operating as a corporation requires more administrative work—and your business may pay corporate taxes—but there can be operational benefits.

Four business structure options for your new venture

Once you’ve answered the questions above, you’ll be in a stronger position to decide about what business structure to choose. There are various options that may be available depending on your circumstances and state of residence, but here are several options that your legal counsel and tax advisors are likely to recommend:
 

• Sole proprietorship
  This is the simplest, most common business structure in the U.S. If you’re doing business under your own name, you can go right to work as a sole proprietor without any paperwork to file with your state government, although certain business licenses may be required. With a sole proprietorship, you simply pay personal taxes on what your business earns.
  
  One significant downside of using this business structure is that the owner is personally liable for legal claims and debts against the business — meaning your personal assets aren’t protected against business losses. As a sole proprietorship, your business may also be limited in its ability to secure bank loans.
   

• Partnership
  If your new venture will have two or more owners, you can choose to form a general partnership, a limited partnership, or a limited liability partnership. There is often less paperwork required to form a general partnership than may be required for other legal entities, but like a sole proprietor, general partners can be held personally liable for debts and liability claims.
  
  Limited partnerships and limited liability partnerships can offer some liability protections as well as tax benefits compared to corporations. If you choose to form a partnership, discuss with your legal counsel creating a legally binding partnership agreement that details ownership percentages, responsibilities of partners, distribution of profits and losses, and other operational information.
  
  
• Corporation
  There are two main types of corporations for businesses, S corporations and C corporations. Corporations may provide better protection to owners from personal liability, but they carry a greater administrative burden and can result in higher taxation.
  
  C corporations can issue stock, have an unlimited number of investors, and become a publicly traded company. S corporations, which have limits on the number of investors, allow some profits and losses to be passed to owners to avoid corporate taxation.
  
  
• Limited Liability Company (LLC)
  An LLC structure offers some of the benefits of both partnerships and corporations, but the administrative burden is lower. There is typically no limit to the number of owners — called “members” — of an LLC, so you can go into business with others using this structure.
  
  LLCs provide some liability and financial protections to business owners. If your LLC business files for bankruptcy or faces a liability claim, your personal assets may be protected. Revenue from LLCs can be passed directly to owners, so your business won’t have to pay corporate taxes. The combination of limited liability protection, administrative simplicity, and lower taxation can often make an LLC the best structure for many new small businesses.