Quartz Hill Chamber Business Development Center

Choose a Structure

For legal and financial purposes, you must have a formal structure for your business. Your four basic choices:

    1. Sole proprietorship. The owner and the business are the same
    (usually a service business, with the owner providing the service). Business and personal tax returns are filed together.
     According to the U.S. Small Business Administration, more than 75% of all businesses operate as sole proprietorships.
        * Advantages: Simple and inexpensive (start-up costs are low); maximum control.
        * Disadvantages: Personal legal liability; limited ability to raise capital; succession issue.

    2. Partnership. A business with more than one owner; divides profits and losses among participants.
    It's most appropriate for lawyers, doctors, and other professional service providers, but not for most new businesses.

    3. Incorporation. A likely choice for businesses with employees or bank financing. It costs $500 to $1,000
    or more for attorney and fees. A corporation is a state-chartered organization owned by shareholders.
    The shareholders elect a board of directors who are ultimately responsible for management of the business.
     There are two forms of for-profit corporations (see below).
        * Advantages: Personal assets are protected if the business fails or is sued.
        * Disadvantages: Taxes on profits are potentially higher than with sole proprietorship.

    S corporation. So called because it is under subchapter S of the Internal Revenue Code; known as a Sub S.
        * Advantages: Most appropriate for start ups; limits personal liability; eliminates double taxation.
        * Disadvantages: Taxes on many fringe benefits; limits on retirement benefits; restricts number of stockholders to 35.

    C corporation. So called because it is taxed under regular corporate income tax rules.
        * Advantages: Limited liability; access to capital (can raise money through sale of stock); perpetual life
        (unlike sole proprietorship); ownership can be transferred.
        * Disadvantages: Profits are subject to double taxation (corporate income is taxed, and then dividends
        paid to stockholders are taxed as part of the individual's income); regulation and paperwork; start-up costs,
         including legal and filing fees.

    4. Limited liability company (LLC). State chartered organization that allows for the reduced personal
     liability of a corporation, but with the tax advantages of a partnership.
        * Advantages: Liability protection; no "member" restrictions; no double taxation; easier access to capital
         (compared with partnership).
        * Disadvantages: Tax and liability benefits vary from state to state; high costs of start up.