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What are the 3 most common business formations?

On Behalf of | Oct 17, 2022 | Business Transactions

You’ve got great ideas, you’ve got talent and you’ve got the drive – now you just need to get your business up and running.

To do that, you need to decide how you want your business to be structured. While there are more than three ways to structure a business, the most commonly used structures are sole proprietorships, limited liability companies (LLCs) and corporations. Each has its own unique benefits and drawbacks.

What’s a sole proprietorship?

This is the easiest business structure to have, and it’s where most people start. There are few administrative requirements and no real paperwork because you and your business are the same legal entity.

It sounds great, the drawbacks here are that you have no way of limiting your personal liability if something goes wrong. If, for example, you end up losing a lawsuit related to your business, the plaintiff in the case could potentially come after your personal savings account, your house and your car – not just the business assets.

What’s an LLC?

LLCs bridge the distance between sole proprietorships and corporations. You can operate an LLC with or without partners, and they generally offer some of the flexibility of a sole proprietorship while creating a barrier between your business liabilities and your personal assets.

The drawbacks to an LLC are often related to regulatory compliance and fees. You have more paperwork involved than a sole proprietorship and you may end up paying more taxes than you would either with a sole proprietorship or a corporation.

What’s a corporation?

Corporations are their own legal entities. They offer hard-line protections against personal liability for the shareholders, and it’s often much easier to obtain financing and investors for a corporation than any other type of business structure.

However, corporations are far more paperwork-intensive than either a sole proprietorship or an LLC, and you have to do a lot of record keeping. Documentation has to be filed regularly with the state and the government, and there are a lot more associated costs.

This is just a thumbnail sketch of the pros and cons of each type of business structure. You definitely want to do a lot more investigating to find out which is right for your business – and what it takes to set things up correctly.