LLC, Corporation, Partnership, or Sole Proprietorship: Which Legal Structure is Best for Your Business?

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LLC, Corporation, Partnership, or Sole Proprietorship: Which Legal Structure is Best for Your Business?

Before you start your business, you need to give careful thought to the type of legal structure that you will choose. The decision that you make will likely have dramatic implications for years to come, especially regarding personal liability exposure, taxation, your potential to attract investors, and your ability to main control of your company.

At the risk of oversimplifying, in the US there are five basic choices when selecting a legal structure for your business.

Defining Legal Structures for Businesses

A limited liability company (LLC) is a way to organize a business that limits the liability for the owners, who are called the members. It’s flexible and scalable, as you are taxed more like an individual person than a corporation, but it can shield you from the personal liability associated with a sole proprietorship.

A corporation is a company or group of people authorized to act as a single entity. The liability is put on the corporation itself, and it is taxed separately from the owners and shareholders. A corporation is a more formal structure than a limited liability company, as the owners of a corporation are called shareholders and are formally issued shares of stock in the corporation.

Corporations that are “C” corporations are fully taxable entities themselves. This means that not only does a “C” Corporation have to pay taxes on its profits, but assuming the C corporation distributes profits to shareholders (called dividends), they shareholders must each individually pay taxes on this income as well.

Corporations may also elect to be “S”corporations. Unlike C corporations, S corporations are not subject to dual taxation. Instead, the profits of a S Corporation are declared as personal income on each shareholder’s federal income tax statement. Note that individual state governments may or may not recognize the S corporation status and may or may tax S corporations directly. Also, S corporations face more restrictions than C corporations regarding the number of shareholders and what kinds of organizations beyond individuals may be shareholders. Hence, start-ups that plan on raising money from venture capital firms for example, should not elect “S” status.

A sole proprietorship is a type of business entity that’s run and owned by a single person. For this option, there is no legal distinction between the business and the owner.

Lastly, a partnership is a joining of individuals in which the partners share profits or losses; risks and rewards are generally shared proportionately to ownership. However, if the partnership runs debts that the partnership can’t pay for and that one partner either can’t or won’t share in paying, then the remaining partner or partners may be held personally liable for 100% of the debt of the partnership.

Choosing the Right Legal Structure for Your Business

Not only is every business situation unique with regard to the best type of legal structure, but also your personal situation, such as your degree of risk aversion and your net worth outside of the business, is an important variable to consider.

Because there are a number of disparate variables to consider and weigh when choosing a corporate structure, I will give examples of different scenarios and which corporate structure I would apply to each situation.

I would also recommend that, in addition to getting comfortable yourself with the basic pros and cons of the four main business structures, you also consider consulting a business attorney before you form your business organization.

Sole Proprietorship
In the following business situation, I would choose to choose to establish a Sole Proprietorship.
Sample business: Lawn Mowing Service

• No employees
• All services performed by the owner
• No outside investors expected
• Revenue expectation year one = $50,000
• Owner net worth outside of business = $35,000
• Total initial business investment expected = $20,000

It’s quite possible in this kind of business that the operator might face some small claims for damage to property. However, the chance of facing and losing a claim for a much larger incident is small. Hence, it is my opinion that the added legal protection of a separate legal entity, such as an LLC or a corporation, is likely not worth the cost and paperwork involved.

However, if employees were hired to work in the service, the possibility of significant risk increases slightly with the addition of each staff member. So the more employees that were hired the more likely I would consider another form of legal organization, most likely an LLC.

There might be some tail risk, for example, if an employee becomes injured and disabled on the job and the workers’ compensation insurance that you are legally required to carry does not adequately cover all claims. Also an employee may be more likely than the owner-operator to cause damage to a customer’s property or become involved in an automotive accident with company equipment.

Partnership
For the following business situation, I would choose to choose to establish a Partnership.
Sample business: Online Marketing Consulting Firm

• Two partners, one part-time administrative employee
• All professional services performed by the two partners/owners
• Outside investment was a $20,000 startup loan from a relative
• Revenue expectation year one = $150,000
• Owners respective net worth outside of business = $105,000 and $30,000
• Total initial business investment expected = $35,000

In this situation, I believe that the downside risk is probably minimal. Yes, in these kind of businesses you often have clients who complain about the quality of the work, and some even threaten to sue. But, as long as you’re doing quality work, fulfilling your contractual obligations, and keeping solid documentation, your chances of actually losing a significant claim in court are minimal. I would tend to skip the cost of forming an entity that would limit legal risk, such as an LLC or S Corp.

However, no matter how friendly you are with your partner, I would have a very clear and binding partnership agreement, including how you are going to dissolve the partnership if you come to a major disagreement.

LLC, Limited Liability Company
The following business situation I would choose to choose to establish as a LLC (a Limited Liability Company).
Sample business: Dog Kennel Service

• One owner and six employees
• No outside investment; owner is financing business with personal savings
• Revenue expectation year one = $150,000
• Owners net worth outside of business = $45,000
• Total business investment expected = $70,000
Given the above details, even an owner who is particularly risk-adverse and well-insured would be wise to choose a form of business organization that protects their personal assets in case the business goes south. In this situation, the number of employees, the fact that you’re going to have a physical premise that customers will visit, the value of the dogs, and the danger associated with the animals would suggest that there is significant risk associated with the business. Hence, for this business I would choose an LLC, Limited Liability Company, structure.

In this situation, an S corporation would not be a bad choice either, but I would tend to choose an LLC.

C Corporation
The following business situation I would choose to choose to establish as a C Corporation.
Sample business: Internet Food Delivery

• One founder/owner and six employees
• Initial outside financing of $50,000 from family and friends, but expect another round of financing of over $500,000 from venture capital firms within 12 months
• Revenue expectation year one = $700,000
• Owners net worth outside of business = $15,000
• Total initial business investment expected = $70,000
The key in this situation is that the business expects to raise capital in the not-too-distant future from venture capital firms. These firms are going to invest only in a C corporation structure. In addition to that, even if the company wasn’t seeking VC investments, the nature of the business with the heavy delivery component, involving owned or non-owned company vehicles, significantly enhances the tail risk of the business.

In summary, while each business situation is different, and I would suggest you consult with a business attorney, if you’re still in doubt, I would consider choosing an LLC, Limited Liability Company.


About Bob Adams

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.

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Hi there, I’m Bob Adams.

I’m a serial entrepreneur and self-made multimillionaire.

I’ve started dozens of successful businesses of all types and sizes including … bike rentals, house painting, employment service, retail business, multimedia company, book publishing, tourist maps, job fairs, Internet businesses, software business, employment advertiser, and used boat sales. 

Most of these businesses I started in my home on a very small budget. 

My biggest success is my book publishing company that I started in my basement apartment with just $1500 and later sold for $40 million. 

I’ve learned what really matters in business. I’ve discovered the concepts that make or break businesses. And I’ve used them to build one successful company after the next. 

Now, my mission is to share what I learned with you – so that you can succeed in your own business. 

That’s why I created Start-a-Business 101.

Success = recipe + ingredients

In Start-a-Business 101, you will get my exact recipe and ingredients for success. I will show you what to do at every step in starting a business. 

You’re not going to go through years of trial and error. 

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Because the recipe for business success is waiting for you in my course, Start-a-Business 101

In this course you will get the same proven strategies and tactics that I used to create my successful businesses.

My books and courses have been featured in…

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 You will be following the best advice available today. 

You will be getting the same techniques and strategies that I used to build one successful business after the next including the one I started with $1,500 and sold for $40 million. 

You will put your startup on the fastest and most proven path to success.

Here’s the course for your new business journey. Beginning entrepreneurs will hugely benefit from Start-a-Business 101. The videos clearly explain each element of building a new business. The advice is savvy and on point throughout. I highly recommend it for anyone involved in any kind of startup.

Rick Williams – Managing Director, Williams Advisory Partners LLC

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Watch just one video lesson per day and you will complete the whole program in about 10 weeks. Or you could even binge watch the entire course in one weekend. It’s up to you!

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Watch the overview video

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  Start-a-Business 101 Course Content

1.  How to get started with your business

2.  Discover hundreds of great business ideas

3.  How to choose the best business idea for you

4.  How to validate your business idea

5.  Find the perfect name for your business

6.  How to choose the best legal entity for your business

7.  How to create a powerful competitive advantage

8.  How to create your business plan

9.  How to do your accounting and financial statements

10.  How to get the money you need to start your business

11.  How to create your marketing and attract customers

12.  How to build your online marketing presence

13.  How to make sales and land your first customers

14.  The Small Business Toolkit

15.  The Discussion Board

Every step of the course is filled with videos and companion tools to show you exactly how to start your business.

Start-a-Business 101 includes 46 templates, worksheets, checklists and samples

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Fill-in the blank templates make it easy to plan your business.

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Looking for a business idea? Discover the critical questions that you must ask to find the very best idea for you.

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This course is made for you:

  • If you want to generate a new income stream.
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Start-a-Business 101 will work for all types of businesses. And it will work for all sizes of businesses from one-person home-based businesses to larger enterprises.

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I can promise you that you will get the very best strategies and ideas available today. You will get the exact techniques that I used to build my businesses, including the one I sold for $40 million.

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That’s right. You can have full access to the whole course for 60 days. If you decide it’s not for you, or if you don’t love it, I’ll give you a 100% refund. No questions asked.

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I want you to start a business. And I want you to start it right.

 I have researched the marketplace for over a month to identify a viable and comprehensive ‘go-to’ guide on how to best launch a small business. This course offering from Bob Adams met more than what I was looking for.

Steve Cox – Experienced Businessman

Get Start-a-Business 101 and get $750 in bonuses – free

I am pleased to tell you that I am adding two limited time bonuses to Start-a-Business 101

These bonuses will make it even easier and quicker to get your own business up and running. 

The Ultimate Checklist to Starting Your Own Business 

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 Bob has been a close friend and trusted business adviser of mine for years… guiding me through the challenges we all face as entrepreneurs. Hands down Bob is one of the most talented, and successful entrepreneurs I know. Thanks Bob!

Matt Marshall – Founder, MGM Capital Investments

Frequently Asked Questions

When does the course start and finish?

This online course is completely self-paced – you decide when you start and when you finish.

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This course is for anyone thinking about starting a business. You don’t need to have any previous business experience whatsoever. Even if you have business experience, you will discover a vast amount of powerful new ideas that will help propel your business ahead.

Can I download any of the content?

Of course! All the worksheets, case studies, samples, and templates are downloadable.

Start a business you love, earn more money and live the life you want.

Start-a-Business 101 is the fastest and easiest way to learn how to start a business and become a knowledgeable and successful entrepreneur.

Start-a-Business 101 is a complete proven program that will take you step-by-step through your entire startup journey.

You will get…

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In just a few minutes a day, you will learn how to start your own business.

You can test drive the entire course for 60 days.

That’s right. You can try Start-a-Business 101 risk-free for 60 days. You will have full access to the entire course. If you decide it’s not for you, or if you don’t love it, I’ll give you a 100% refund. No hassles. No questions asked. I want to help you succeed in your own business.

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